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Look before you leap into gas field: Gorgon

CRITERION: Tim Boreham | October 14, 2009
Article from: The Australian
LIKE the Oxfam goat at Christmas time, the Gorgon-inspired liquefied natural gas boom off the West Australian coast is shaping up as the gift that will keep giving for a long time.

The Gorgon project (worth $50 billion) promises to kick-start the WA economy almost by itself, but the more direct beneficiaries are the dozens of listed providers vying for lucrative supply and construction contracts.

Coupled with the Queensland coal-seam gas sector, Gorgon represents an enormous upside for providers of infrastructure, engineering, oil and gas equipment, logistics and accommodation.

"The Gorgon project is Australia's largest single resource project and is set to deliver significant economic benefits, with industry observers suggesting the total value of the project's sales could reach $300bn," says Shaw Stockbroking. Gorgon has 40trillion cubic feet of gas (in layman's terms: a lot) and an estimated productive life of 40 years.

The firm identifies key beneficiaries as engineering giant Worley Parsons (WOR), Mermaid Marine (MRM), Toll Holdings (TOL), Transpacific Industries (TPI), Downer EDI (DOW), Monadelphous Group (MND), Clough (CLO) and RCR Tomlinson (RCR). And let's not forget the big daddy of 'em all, contractor Leighton Holdings (LEI).

While reluctant to throw a wet blanket on the enthusiasm, Criterion must offer a note of caution: excitement about the deal has also resulted in share price effervescence.

Arguably the easy gains have been eked out of the obvious candidates such as Worley Parsons, but it's not hard to find smaller overlooked plays with a claim to a slice of the lucre. Other low-PE stocks exposed to the wider oil and gas sector include drilling fluids and down-hole installation specialist Imdex Ltd (IMD), accommodation providers Nomad Building Solutions (NOD) and Decmil Group (DCG), mining consultant Runge Ltd (RUL) and building services mob Programmed Maintenance Group (PRG), which has a marine maintenance arm.

The acquisitive Neptune Marine Services (NMS) (see the story below) doubled revenues and profits last year after a few years of false starts.

Another one is waste manager Tox-Free Solutions (TOX), which enjoys the potent advantage of having WA's only licensed liquid waste incinerator, at Port Hedland. And extracting hydrocarbons is a truly gunky exercise.

Out of left field comes ISS Group (ISS), which sells an information technology system called BabelFish. Designed especially for the oil and gas sector, BabelFish provides a single view of complex operations (such as disparate production fields).

ISS last month won a $615,000 contract with Origin Energy to manage gas and liquid sales for the Kupe production facility in New Zealand's Taranaki Basin. ISS's other clients include BHP, Rio Tinto, Woodside, Shell and BG Group.

We'll also mention engineer and contractor Forge Group (FGE), which has just entered the sector but already has won a $10 million contract for Gorgon design and construction work on Barrow Island, a $50m contract for compressor stations on the Dampier-Bunbury gas pipeline and a $32m deal to build stuff for Woodside's Pluto project.

A month ago the stock was a screaming buy but has rallied from the $1 level close to management's self-assessed valuation of $1.82 a share. It's one to buy on a pull-back.

In the accommodation sphere, Nomad specialises in manufacturing and delivering modular buildings for the resources sector. Similarly, Decmil specialises in WA oil and gas and mining camps and non-process building and construction. On broker Hartleys's estimate, both stocks are trading on present price-earnings ratios of just more than five times.

All these stocks suit proponents of the idea that the best way to prosper in a metaphorical gold rush is to buy into those that provide the shovels.

Those who prefer to cut out the middle man should buy the likes of Woodside, Origin Energy and Santos. But bear in mind that the Chevron-led Gorgon project has no locally listed partners.