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PDF of StockAnalysis Article
24_04_2019_Peter_Strachan.pdf
A SeaChange in Communication to Shareholders
The time was right, and the presentation delivered by theCEO on 14 May, was a game changingcommunication of key parameters associated with post NGP gas sales.
Key strategic objectives were nominated with respect toamortisation of debt and renewed emphasis was placed on high value explorationas the prime means of achieving increased shareholder value.
Expected free cash flow to finance exploration was quantifiedand the presentation should put an end to shareholder concerns on futureprofitability.
Mytake on the Key Business Parameters that were presented.
ØThe future adjusted FCF after debt serviceof $13M/year for 2019-20 and $20M/year after 2021
Supported by:-
ØAverageAdjusted (Site gate) Gas Sale Price $5.14/GJ
ØUnitCash Production Cost $2.28/GJ
ØTotalAdjusted Sale Price of $5.14/GJ would indicate operating margins in the order of $2.75-$3.00/GJ.
ØA $1.00 increase in margin (Resultingfrom rising East Coast Gas Prices) would add $14M/Year in Free Cash Flow after Debt Service Based on CurrentSales.
ØDebtAmortisation Period over 7 Yearswith $22M paid from Earnings in 2019.
ØGoForward Sustaining CAPEX & other exploration inclusive of productiondrilling & recurring exploration costs could be in the order of$10M per annum.
ØApproximateReserve life averaged across all fields 10Years
My Personal Comments: -
1.I would expect that $2.28 Cost of production would trend downwards and that therefinancing exercise would result in lower interest rates on outstanding debt however the major improvement in adjustedFCF after debt service is more likely to come from future GSA’s that reflect arising East Coast market.
A$2.00 increase in GSA prices could easily double the $20M post 2021 FCFAD targetto say $40M/Year.
Ifwe add say a further $15M/Year from the Range Gas Project (See below), we couldnow have > $50M before tax Etc. to feed into “high-potential explorationactivities”.
Theunderpinning financial strategy looks pretty sound to me and short of a hostiletake-over, the CTP board are now in a much better position to wait for an attractivetransactional offer to shareholders.
2.Using the average adjusted sale price $5.14/GJ site gate price and its associated$2.75-$3.00/GJ, margin shareholderscan now come up with a reasonable approximation of future FCF as East Coast gasprices rise.
Published rates for haulage(Say to Wallumbilla) are easily obtained from the Jemena & APA websites andthe Wallumbilla Gas prices from the AEMO website to estimate GSA site gateprices.
https://www.apa.com.au/our-services/gas-transmission/current-tariffs-and-terms/current-tariffs-and-terms/
https://jemena.com.au/pipelines/northern-gas-pipeline/services
3.IMOthe production side of the business is best thought of as a cash productionmachine that provides exploration funding.
ØSimply valuing the business as a productionoperation tends to overlook CTP’s true share price valued in accordance withits potential as an exploration company.
ØCTP is now in the enviable position ofbeing able to fund organic growth through exploration from our current gasproduction operation.
4.From a shareholder perspective I think thismeans that dividends are unlikely to be paid to shareholders during the 7 yearamortisation period for existing debt and that the ultimate reward to shareholderswill be delivered by a takeover.
The Next cab off the rank isDukas.
At this point I would like to takethis opportunity to thank psi81 for excellent comments on Dukas, Surprise Etc.written so they can be easily understood by shareholders.
Much as I would like to seethis level of detail coming from CTP, I am very thankful that we have theseposts and as I have said before I am not a geologist so please take notice ofpsi where my comments inadvertently differ from psi’s.
To make things easy I havetaken the liberty of adding the following are links to some of psi’s posts fromthe HC search engine under “Dukas”.
These are well worth readingfirst!
https://hotcopper.com.au/threads/2018-price-target.3846614/page-15?post_id=28994183
https://hotcopper.com.au/threads/ann-latest-company-presentation.4426064/page-2?post_id=35545580
https://hotcopper.com.au/threads/ctp-use-of-ngp-capacity.4415219/page-40?post_id=35644376
https://hotcopper.com.au/threads/ann-reserves-update.4532523/page-34?post_id=36496961
https://hotcopper.com.au/threads/dukas.4541345/page-14?post_id=37227278
https://hotcopper.com.au/threads/ann-resignation-of-director.4626481/page-16?post_id=37366436
https://hotcopper.com.au/threads/ann-resignation-of-director.4626481/page-33?post_id=37408284
https://hotcopper.com.au/threads/march-19-quarterly-projections.4697702/page-22?post_id=38363363
IMO it is however worthbearing in mind that with a drilling success could pave the way for the entirebasin becoming a gas province.
The following is a first cutat a relationship between Tcf from a success case to share price., “On the backof a cigarette packet”!
The broker reports tend tofocus on 2 fundamentals.
·Whatis the likely CTP’s share of Dukas reserves?
Therocks haven’t spoken yet so we are still guessing!
·What valuewould a potential buyer place per gigajoule on these reserves?
Wellthis is brokers stock in trade so their guess is as good as any!
Psi’s posts above provide somesort of an idea on the chance of success.
The CPSA recently advised that“Well known O&G scribe Peter Strachan has given us permission to distributehis article on the CTP Santos Dukas JV.” It is well worth reading.
See PDF FileAttached to this HC post.
The above StockAnalysisarticle assesses a 1.5 Tcf discovery, ascribing an in situ value of A$0.90 per GJ togas discovered in this location.
Atthis point it is worth noting that Dukas is potentially a multi Tcf target sofor this exercise I have gone with a 1 Tcf example as opposed to theStockAnalysis number of 1.5 Tcf. which gives 300 PJ net to Central.
I don’t blame retailshareholders for getting lost here but what happens is that there is aconvenient approximation for conversion of trillions of cubic feet of naturalgas (Used to discuss potential discoveries) and Petajoules (Used to discussreserves).
Put simply…
1 Tcf (Trillion Cubic Feet of gas) isabout 1,000 PJ
If we take the in situ transaction price of $0.90/GJ mentionedin the StockAnalysis article this gives us…
CTP 30% share of 300PJ = 300Million GJ X $0.90/GJ =$270M as anindicative value for the CTP 30% share of a successful Dukas 1Tcf outcome.
Divided by the number of CTPshares this comes out at $0.37/Share/Tcfwhich is lower than the $55C/share mentioned in the StockAnalysis article baseda 1.5 Tcf success case.
The whole thing at this point is an educatedguess but at least it gives us some idea!
Interestingly,the 18/05/19 CTP market cap of $99.81M divided by 30/06/18 2P reserves of122.9PJ (With a connected pipeline to the East Coast market) comes out at$0.81C/GJ of 2P reserves.
To get some idea of Dukas timing,please refer to a really informative HC post by Michaeljob.
https://hotcopper.com.au/threads/ann-dukas-1-well-spuds.4717531/page-65?post_id=38625145
I amnot aware of any present plans to connect Dukas to the Amadeus pipeline andwould be interested to hear any news on this.
I am still working on thebasis that last Santos annual report showed a dotted pipeline to the Santosprocessing facility at Moomba and in any case, it is a much more direct tolocal & East Coast Export markets.
IMO a pipeline from Dukas toMereenie surface facilities may have access approval issues & in any caseCTP needs the Mereenie processing operation for say 10 years.
Surat Basin CSG Range Project(ATP2031)
·Targeting75-90 PJ Net to Central
·5 wellexploration programme planned for the fourth quarter of this financial year,with the potential for another 4 well pilot project depending on technicalresults.
·Thepermit area covers 77km2
·RoughTransaction Value of say $1.80 /GJ
Basedon a historic (CSG) transaction prices of say $1.80/GJ and the recent IronbarkTransaction of $1.79
75Million Gigajoules Net to Central X say $1.80 gives a hypothetical transactionvalue of $135M = 19C/CTP Share
UnlikeDukas the Range CSG tenement IMO has a pretty good chance of being commercial andCTP are in the very good position of not having to spend money until IPLexecute a 5 well Exploration & Appraisal drilling program.
·Lookedat as a contribution to FCF, and a CTP share of extracted gas of say 20 TJ/dayfor 10 years (Which is at the lower end of Net to Central share) & say a marginof $2.00/GJ which should be conservatively achievable with rising East CoastGas Prices would give us an FCF of say $15M/yearbefore tax which would add to our exploration funding capability.
Closing Comments
I personallysee the latest CTP presentation as heralding a much clearer understanding byshareholders of future business performance and hope that this will promote a muchmore realistic understanding of CTP share value.
As Iwrote this, I was increasingly convinced that CTP now has a solid foundation onwhich to grow shareholder value organically using existing gas productionassets together with the Range gas Project.
Explorationsuccess at Dukas and other CTP tenements will simply accelerate the process.
Regards
OGP
(20min delay)