rights issue, page-2

ch4 gas limited (chx) wilsons recommendation...........hmmmmmmmmm

CH4 Gas Limited (CHX)
Board
John C Reynolds Chairman
Louis I Rozman CEO, MD
Jeremy W Barlow Non-Ex Dir.
Sandy Lockhart Non-Ex Dir.
Eytan M Uliel Exec Dir
David C Wrench Non-Ex Dir.
MacDonell Rhoem Jr Non-Ex Dir.
Management
Louis I Rozman CEO, MD
Kerry J Parker CFO, CoSec
Overview: CH4 Gas Limited (CHX) was established in early 2000 to develop and
commercialise CSG resources in the northern Bowen Basin, Queensland. The
company raised capital through an Initial Public Offer (IPO) in April 2004, and listed
on the ASX.
Its foundation project is the Moranbah Gas project, which will underpin its future
growth, commencing with gas supply to the Townsville market. The Moranbah
project is located 170 km WSW of Mackay.
CH4 has formally commenced gas sales into a Gas Sales Agreement with
Enertrade. The Enertrade contract is underpinned by demand from the Townsville
power station. Other industry in the Townsville area that either has committed to, or
is evaluating, conversion to CSG as an energy source, includes the QNI-Yabulu
nickel refinery, Xstrata copper refinery, and the Mount Stuart Power Station.
Security Details
ASX Code CHX
Share Price $ 1.03
Issued Shares M 80.0
Issued Options M 5.8
Fully Diluted
Shares
M 85.8
Market Cap $M 88.4
Valuation: Our valuation of CH4 Limited is based on the Enertrade gas sales
agreement, its initial 12.5 PJ off-take level, and Enertrade’s more recent indication
that it intends to raise its off-take requirements to about 20 PJ p.a.
In addition it includes the value of sales to BHP following the conversion of QNI’s
existing roasters from fuel oil to natural gas. We are confident that following a 12
month trial with one converted roaster, that conversion will proceed in 2007/08.
On a discounted cash flow basis, using a 10% discount rate, we value CH4 at
$1.21/share.
Upside to our valuation is foreseeable. A further increase in Townsville area gas
demand is expected to occur in 2009, when the Mt Stuart Power Station potentially
converts to natural gas. This conversion will require an additional approximately 16
PJ pa of natural gas, and subject to proceeding, lifts our valuation of CH4 to
$1.60/share. Beyond this, a further 20PJ p.a. of gas will be required to meet
demand from a newly proposed gas-fired power station in the Townsville area.
Assumptions: Our base case assumptions for the Moranbah Gas project (MGP)
include initial off-take at 12.5 PJ p.a. growing over 2-3 years to 20 PJ p.a.
With average peak gas flow rates between 500 mcfd and 1,000 mcfd, we have
assumed an average 700 mcfd for the MGP.
The average cost of drilling and completing a CSG hole of CH4’s surface-to-in-seam
‘chevron’ configuration is assumed to be $450,000 per hole combination.
Sensitivities: A 100 mfcd increase in gas flow rates for CH4’s projects would mean
an increase in FY06/07 NPAT of $2.7m (+32%), and an increase in dcf value of
$0.36/share (+39%).
An increase in the cost of drilling and completing a hole of $50,000/hole, would
reduce FY 06/07 NPAT by $0.3m (-3.5%) and reduce our dcf value by $0.08/share
(-8.8%).