Strong Prospects For Cooper Energy In Tight Gas Market
FNArena News - June 02 2016
-Strong position in Sole field development
-Momentum from AGL sales agreement
-Utilities keen to source new suppliers
By Eva Brocklehurst
Australia's east coast gas market is tightening. All three major LNG projects in Gladstone, Queensland, are ramping up, but with the aid of third-party volumes. Current gas demand from Gladstone stands just short of 3,000TJ/day and is set to grow to over 3,500TJ/day, Canaccord Genuity observes.
With the major domestic players downgrading reserves, the broker believes there is a material opportunity for Cooper Energy (COE), as the domestic market needs supply alternatives to that provided by Esso/BHP Billiton ((BHP)), and the company's stake in the Sole gas field fits the bill.
Gas supply from the Esso/BHP Longford plant in Victoria is up 50% in the year to date while the Santos ((STO)) Moomba gas plant is up 88%, the broker highlights.
As the Cooper Basin fails to live up to expectations, Canaccord Genuity believes Cooper Energy's strong leverage from its 50% equity interest in the Sole gas field and Orbost plant, and 100% of the BMG field, both offshore Victoria, puts it in a key position.
While other operators are still in the throes of proving a commercial resource, Cooper Energy has moved to a position at which it is more than half way through its front end engineering design (FEED) on Sole, signing agreements with tier 1 gas customers. The first was signed in August last year and AGL Energy ((AGL)) signed in March this year. On the above bases, Canaccord Genuity initiates coverage of the stock with a Buy rating and 34c target.
Final investment decision (FID) is scheduled for the September quarter 2016. Ahead of this the broker observes a number of milestones need to be completed such as refining costs estimates, completing the data room, more gas agreements and finalising funding.
The Sole gas field is a conventional play which the broker notes has relatively simple geology, and is close to infrastructure. This makes it a logical candidate for development in a tight gas market where demand has trebled.
Most recent cost estimates for Sole are $2.30/GJ for development and 80c/GJ for operating expenditure. Canaccord Genuity notes this is well below the estimated average cost of production for undeveloped Queensland CSG and undeveloped Cooper Basin resources.
Cooper Energy has sales agreements covering 60% of its 121PJ in 2C resources and the broker believes it is on track to meet a target of 80% of contracted sales pre FID. The 53PJ agreement with AGL energy ((AGL)) is observed as providing substantial momentum to the project.
Canaccord Genuity suspects the company's recent decision not to complete the data room process at Sole until after the FEED is completed is a sign that costs could be coming down. The most recent cost estimate for Sole stands at $550m, calculated prior to the oil price slump.
The company's cash footing will rise towards $55m post completion of an equity raising and sale of an Indonesian asset and the broker believes the support from the equity market should encourage the company to maintain a higher level of equity in the Sole development, which in turn signals a long-term positive for shareholders.
Counter-intuitively, the broker believes the problems encountered at Santos, the other 50% owner of the Sole field, are a net positive for the development. Santos has a 66% interest in the Cooper Basin SACB joint venture and in 2015 downgraded reserves by 183PJ. This was the second straight year of downgrades from an area which was expected to have 100PJ in reserve additions, the broker notes.
The new CEO of Santos, Kevin Gallagher, has signalled the company will no longer sanction developments which require a serendipitous rise in oil prices to be economic. At current prices its Cooper Basin asset is loss-making and Canaccord Genuity suspects that if that cannot be made to work under current prices, then the company will probably look to reduce its exposure.
Yet Santos has a contractual commitment to supply 750PJ to GLNG and another 150PJ in legacy contracts. Hence, this gas must be sourced from somewhere. Meanwhile, the broker observes the market is becoming increasingly nervous about relying on the Longford and Moomba plants.
It should thus come as no surprise that major utilities have expressed a desire to have new suppliers in the market to reduce concentration risk and ensure competition. Enter the Sole field and Cooper Energy's potential into the broker's figuring.
The Sole project makes up 55% of the valuation of the stock and remains the major driver of the Buy rating. Without a positive view on Sole the stock is seen more than fairly valued, even under a rising oil price.
Cooper Energy's other interests include the Cooper Basin's Western Flank, with a 25% stake in a joint venture with Beach Energy ((BPT)) and a 30% stake in a joint venture with Senex Energy ((SXY)). The company is currently marketing the Tangai-Sukananti KSO in Indonesia, its remaining asset in the country.
The company also has the Manta project in the BMG complex, which the broker observes has had a troubled history. Last month Beach Energy decided to relinquish its 35% interest for nil consideration. While this is not the valuation an investor would relish, Canaccord Genuity maintains this would not be the first time that Cooper Energy has identified value where others have not.
Cooper Energy intends to focus on the gas resource in the field. While yet to be convinced this is ultimately an economic development, the broker believes, if any of the prospective plays work, the upside could be material.
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