oilbarrel.com summary

04.07.2007
European Gas Limited Signals A Major Acquisition Could Be On The Cards
Coal bed methane specialist European Gas Limited (EGL) has entered a funding agreement for €36 million (A$58 million) to help it buy a series of producing gas assets in Europe and for working capital purposes. No further details of the proposed acquisition have been released as ASX-listed EGL is still in the due diligence process and is bound by confidentiality clauses.

The funding agreement involves two tranches of convertible notes, with a three-year term and a base coupon rate of 5 per cent. The notes would convert into 48.5 million shares, almost 19 per cent of the company’s current capital fully diluted. The notes will be secured against the assets and priced at €0.75, or A$1.20, a significant premium to the company’s current share price of just over A$1 a share.

News of the funding agreement and the proposed acquisition, which if it proceeds is expected to complete within three months, came just over a month after EGL was forced by ASX rules to explain recent increases in its share price and traded volumes. The company could give no reason at the end of the May, explaining that it was pursuing its stated objectives of expanding its portfolio of assets in Western Europe and, accordingly, sometimes entered discussions with third parties about potential acquisitions or other opportunities. At that time, however, no such discussions were at an advanced stage to warrant any announcement. That has obviously now changed and investors will be keen to hear more details of the proposed acquisition.

The fact that EGL is investigating producing assets will be welcome news. A steady revenue stream would be a welcome addition to the books as the company works towards bringing its Folschviller and Diebling CBM projects in the Lorraine region of eastern France into pilot production. It would also bring the comfort of diversity: at present, despite holding CBM permits and applications elsewhere in France and Italy, EGL’s fortunes are heavily weighted to the success, or otherwise, of the Lorraine CBM project.

Fortunately, that project does look promising. The 460 sq km Lorraine permit lies on the Franco-German border in what used to be a major coal mining area, producing 850 million tonnes of bituminous coal. Enron spotted the potential here in the mid-1990s, coming up with a gas-in-place number of 7 trillion cubic feet of gas in an area of 680 sq km.

EGL, mindful of its rather more limited resources, started small, focusing its initial efforts on the Saint Avold and Alsting sub-areas, which comprise 68 sq km. These sub-areas, which account for just 7 per cent of the project’s permit and application area, are thought to hold just under 1 tcf of gas. This is a tasty resource and, after it completed its acquisition of former partner Heritage Petroleum earlier this year, EGL holds 100 per cent of the acreage.

Two test wells have been drilled to date, Folschviller St1 and Diebling St1, and EGL describes the results as “highly positive” with the potential to lead to a considerable upgrade of the estimated resource in place. Engineering design work and selection of contractors for a two-well pilot production programme is well advanced, with drilling work expected to get underway this summer. Multi-lateral drilling will ensure each well has maximum exposure to the coal packets, thus improving permeability and increasing production per well, reckoned to be as high as 1 to 2 million cubic feet per day. Seismic work is also planned at both the Folschviller and Diebling sites to help determine a full-scale development, which will target almost 1 tcf of gas.

This is exciting stuff but it comes at a price: multi-lateral wells are a Rolls-Royce engineering solution and are not cheap to drill. If EGL can get some production and cashflows onto the books it will help with the financing of this promising CBM project.