All the following is my opinion only:
The real value of ESG is not just about the upgrade to come in August. The major point of difference between CSG and conventional gas is that for CSG, there is a very high degree of certainty that much of the Gas in Place will eventually be converted to resources and reserves. It just needs more drilling and sales channels.
Santos knows this, and is looking at least 5 years ahead when gas resources will be 10 times what it is now. The gas and the value is there and they are paying about 5c/GJ for it; not the 50c they are now saying.
What they also know is that ESG's tenements neatly overcome the current environmental concerns because they already have natural fractures and all they need to do is to use multi-lateral drilling in multiple coal seams. The upcoming reserves will not yet be based on this proven technique. The other great advantage of this technique is that there are very few well pads on the ground interfering with farming. The horizontal sections go for kilometres in several directions all feeding back to only one well.
It will be the upgrade after August, based on this technique, which will be the really big upgrade. So don't value ESG on just the next upgrade.
STO also knows that the carbon tax will greatly add to the value of the gas, as it becomes more competitive than coal for base load power generation. That is why TRUenergy is now on board with STO.
In a nutshell, if you take more than an ultra short-term view, ESG is a steal at 90c. As a long term investor who has contributed to past capital raisings due to the obvious huge upside in a gas-starved state, I am sick and tired of the big boys coming in at an opportune time and getting that upside for a song.
A better path for ESG management would have been to wait until after the August upgrade and then:
1. Sell off a further 15% of its tenements to STO's partner, TRUenergy to lock in gas for their future power stations.
2. Sell off another 15% or so to ESG's Japanese partners in the Newcastle LNG project to help de-risk that project. (there will be plenty of gas for both LNG and TRUenergy)
3. Use this extra capital($400M + for a total of 30% of the tenements. after the next upgrade)for proving up multiples of its present resources, achieving GSA's with multiple customers and for the associated development work.
4. Capture the expected share price upside from the remaining 35% ESG interest in the tenements from all of the above.
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