Eastern Star Gunnedah Passes the Acid Test What's Changed Price Target A$0.80 to A$1.10
We raise our price target for ESG from A$0.80 to A$1.10 following Santos’ July 2 announcement to increase its interests in the NSW Gunnedah Basin. We reiterate our Overweight recommendation and note the growing momentum behind NSW CSG.
The A$476m (minimum) Santos transaction includes A$300m for the acquisition of Gastar Exploration Ltd’s 35% interest in various Eastern Star Gas operated exploration permits and A$176m for the acquisition of a 19.99% interest in ESG from Hillgrove Resources. The deal valued ESG at A$1/share plus upside options. Our price target is a premium to the deal’s implied price, but is supported by conditional payments to Hillgrove in the event that STO or a third party takes a greater than 50% interest in ESG and other CSG transactions in NSW.
The transaction implies an EV/3P multiple of A$0.74/GJ of gas. The per GJ multiple compares favourably to 08/09 asset deals in the space which we estimate to have averaged c. A$0.85/GJ.
Investment Thesis • ESG has a significant gas resource potential in the Gunnedah Basin. The company is engaged in ongoing exploration and development work to unlock this value. • Value is supported by ongoing industry consolidation and larger E&P’s interest in NSW’s CSG. • CSG is not low cost across on full-cycle economics and ESG in not immune from this constraint. Market opportunities that confer high value to producers are needed for positive economics.
Key Value Drivers • Domestic gas and electricity prices, the later being sensitive to government policy on carbon emissions. • Capex • 3P market multiples for gas • Resource development progress • LNG pricing
Potential Catalysts • Demonstration of a commercial field development strategy through lateral well drilling H2 ’09. • Meeting 2009 reserve certification programme of net 845PJ of booked 2P reserves. • M&A activity in the sector. • Movement of MoU’s to gas sales agreements. • Development of pipeline infrastructure. • Progress by NSW CSG peers.
Key risks • Unsuccessful lateral drilling programme. • Converting MoU’s to GSA’s. • Accessing high vale gas markets
Summary & Conclusions After the strong deal flow within the CSG space over the last 18 months, attention has now turned to NSW’s Gunnedah Basin. STO announced, after market July 2, a “collaborative” deal with ESG to advance its NSW Gunnedah Basin Seam Gas (CSG) interests. The A$476m transaction includes A$300m for the acquisition of Gastar Exploration Ltd’s 35% interest in various Eastern Star Gas operated exploration permits and A$176m for the acquisition of a 19.99% interest in ESG from Hillgrove Resources. The deal valued ESG at A$1/share plus upside options. The deal confers value to ESG’s NSW assets. It brings ESG’s Narrabri CSG Project (PEL 238) a step closer to higher value and volume market opportunities by introducing a significant Australian E&P into the project. It also underscores the quality of ESG’s NSW gas resource. The transaction implies an EV/3P multiple of A$0.74/GJ of gas. The per GJ multiple compares favourably to 08/09 asset deals in the space which we estimate to have averaged c. A$0.85/GJ and is a slight premium to ESG’s pre-offer trading multiple.
We raise our price target for ESG from A$0.80 to A$1.10 following the July 2 deal. This is a premium to the implied price in the transaction but is supported by conditional payments to Hillgrove in the event that STO or a third party takes a greater than 50% interest in ESG and other CSG transactions in NSW.
We note that ESG is the last remaining CSG company of any size, following relentless consolidation in CSG industry that has resulted in listed companies QGC, Sunshine Gas, Origin Energy, Pure Energy and Sydney Gas (among others) subject to takeovers or offers in 2008. We reiterate our Overweight recommendation.
Detail of the Santos Transaction The Santos 2 July deal to advance its NSW Gunnedah Basin Seam Gas (CSG) interests involves several elements. Details include: • The acquisition by Santos of various Gastar Exploration exploration permits (35% interests in PEL’s 238, 433 and 434) for A$300m. Santos has agreed to pay a further A$20m to Gastar if ESG meets certain reserve targets by 31 December 2009. • The acquisition of Hillgrove’s interest in ESG, equating to 19.99% of shares outstanding. The consideration is A$176m cash, with settlement expected by 20 July 2009. • As part of the deal, Santos has undertaken to make an additional payment to Hillgrove in the event that STO or a third party takes a greater than 50% interest in ESG at a price in excess of A$1/share over the next 18 months. The deal would result in STO holding a 35% interest the Narrabri Gas Project (PEL 238) with the remaining 65% held by ESG, as well as a 20% interest in ESG. The deal confers value to ESG’s NSW assets. It brings ESG’s Narrabri CSG Project (PEL 238) a step closer to higher value and volume market opportunities for its large gas potential, and provides a tangible transactional valuation point.
We note that ESG has no meaningful earnings. Our price target is heavily reliant on transaction multiples for CSG deals in the space which vary widely, making valuation subjective. We expect volatility in ESG’s share price but believe that its acreage is prospective, supported by the most recent deal, warranting our Overweight recommendation.
ESG Price at posting:
84.0¢ Sentiment: Buy Disclosure: Held
