jp morgan initiate coverage

Have seen this report which is very comprehensive at around 70 pages! They initiate with this recommendation which I like:

"Overweight - value worth the wait"

They also present valuations for the various commercialisation options in their analysis (and risk weight them in their TP and DCF valuations). Interestingly they value NLNG at 1mtpa at $0.83/share (including sell-down of equity), 2 mtpa at $1.30 and the ultimate 4mtpa at $2.11. And they value a 4 mtpa sale into a Qld LNG project at $1.59/share. I can live with that! Good to get some numbers from an "independent" source that agree with some of our expectations for ESG longer-term! Here's an extract (from the summary page):

Initiate on Eastern Star Gas with OW and Jun-12 price target of A$0.96/share.

Our price target is based upon our DCF valuation of ESG?s main gas field and risk weighted view of its likely commercialisation options. We use a US$75/bbl real oil price and A$/US$0.75 FX rate long term.

Overview of asset. ESG?s main asset is a 65% interest in a very promising and sizeable coal seam gas acreage in northern NSW near Narrabri (PEL238) with gross 3P of 2,797PJ. Its potential value in a broad sense depends on CSG well pilots proving up further reserves. However, the gas is currently stranded, far from any high-volume transmission pipeline. Monetising that potential depends
upon either possible development options ? or corporate action.

Significant reserves upgrade expected soon. PEL238 reserves have historically been upgraded by 80%+ 2P and 40-50% 3P each review. With the Tintsfield pilot testing a ?new? major coal seam (Hoskissons) we see potential
for a large upgrade (40%-70%+). Results are expected ~August.

Commercialisation options valuable, but timing is uncertain. ESG?s simplest option would be to sell gas north to a Queensland LNG plant expansion. The most lucrative would be ESG?s Newcastle LNG development.
The least valuable would be sending gas in different directions to proposed NSW power stations. All of these plans have varying potential value and degrees of probability, and risk to their proposed FID timetables. Our scenario valuations show that NLNG is worth A$0.83 (1mtpa including sell-down), A$1.30 (2mtpa cumulatively) and A$2.11 (4mtpa cumulatively). We risk weight the NLNG options at 30% T1, 25% T2, 10% T3&4. We 30% risk weight a Qld LNG contract and 5%-20% risk weight the power station options.

Corporate appeal. Media speculation suggests Santos? ~21% equity stake plus 35% in the main acreage is a signal of corporate interest (eg, The Australian, 28 Apr 2011). Either GLNG expansion trains, or ESG reaching NLNG
milestones, could be a catalyst for action.

Catalyst Calendar and risks: key positive catalysts would include a larger than expected reserves upgrade (due ~August); NLNG reaching milestones such as customer contracts, environmental approvals, EPC costing and financing (in the next 6-18 months); oil and domestic gas prices; or a takeover bid. The key risks are disappointing outcomes re the catalysts, plus government CSG regulation.


I wouldn't be surprised if JP Morgan were behind recent buying and hopefully after this report dated 5 July, their clients will follow suit!!

H