Recommendation: SPECULATIVE BUY Investment Perspective: With the conventional gas discovery in the Clarence-Moreton Basin in November last year, Metgasco have come to attention in a way their very good coal seam gas (CSG) story had failed to do. Kingfisher was a sensational natural gas discovery with flows of 3 mcfd, the largest gas discovery ever recorded in NSW. However, it is the certified 3P reserve of 2239PJ of CSG which, for now, provides the solid ground upon which the proposed power and gas reticulation businesses will take shape. Compared to their peers, MEL is a standout in value and location, with the embryonic natural gas story still to unfold over the next several years. We can think of no other gas play which has 100% ownership and operatorship of its assets, and access to effectively the whole of a highly prospective geological basin in a single jurisdiction, with both coal seam gas and conventional oil and gas prospectivity in close proximity to the largest and fastest growing gas market in the country. The company has been ʻflying under the radarʼ, concentrating on building the asset base and failing to offer investors obvious pathways to commercialisation. The power and pipeline projects in gestation should change all of that. The scaleable Richmond Valley Power Station, the Lions Way gas pipeline and the broader eastern seaboard market, possibly including participation in the LNG business, are all in the project pipeline. We expect strong upside from here. There are reasonable expectations that the coal seam gas resource base will continue to grow with possible participation in LNG projects after 2014, while incremental power plant expansions will allow the ramp up of gas production over the next few years. Metgasco is finally emerging, with a strong reserve base, conventional gas exploration blue sky and with some offtake options now apparent. The management team has shown rigour and a strong technical bent, and is now turning their gaze to the commercial aspects and are positioning the company to achieve a higher profile and to get in the game. The way should now be clear for positive news-flow on projects and resources to lead to greater market recognition and a strong re-rating of the share price.
Valuation Metrics Using an EV/Resource metric, we value MEL at A$0.26/GJ of 2P CSG reserve and A$0.05/GJ of 3P CSG reserve.
Asset-based Methodology & Peer Comparison Using an resource metric (Fig.3), we value MEL at A$3.03/share bases on certified CSG reserves only. These values compare favourably with MELʼs CSG peers, this excludes the upside potential of the conventional gas assets, which has no certified reserve to date.
MEL Price at posting:
40.0¢ Sentiment: LT Buy Disclosure: Held
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