Take a look at the above diagram. Basically the ESG owned...

Take a look at the above diagram. Basically the ESG owned permits are to the north, STO's to the south and the ESG:STO JV's are in the middle. All are in NSW. The main potential markets are to the north(export via Gladstone) and south, towards the Hunter/Newcastle port(domestic NSW and export).

Surely it would make a lot of sense for those permits to be cultivated in a co-ordinated manner under one overall strategic plan? It could be done via a takeover of ESG by STO, or by someone who is prepared to pay more than STO for ESG but is then prepared to enter into JV arrangements with STO.

OR it could be done by ESG and STO working together for at least the short-medium term until such time as it may be more appropriate for another party to get involved. My suggestion is for something like this to be progressed:-

1. ESG would become the sole vehicle for developing all existing NSW coal seam interests of both ESG and STO

Under this arrangement STO would sell into ESG it's existing 35% JV stake in PEL's 238, 433 and 434. It would also sell all it's fully owned and operated NSW coal seam gas interests(the dark grey PEL's shown above). ESG and STO would negotiate the values assigned to their respective interests.

To make the illustration simpler let's assume the JV's are 2/3 owned by ESG, with STO owning 1/3... and that STO currently holds 20% of existing ESG shares.

As at the end of last week the market capitalization of ESG was $635 million. Suppose the parties agree a current intrinsic value of ESG is more like $1 billion. Under that scenario ESG's share is therefore around $200m.

Furthermore they may agree ESG's share of PEL's 238, 433 and 434 was $900m and the other interests $100m. They may also agree that STO's fully owned PEL's are also worth say $100m. These figures are to illustrate the concept. IF YOU DISAGREE THEN PLEASE SUBSTITUTE YOUR OWN ESTIMATES TO SEE WHAT EFFECT IT HAS

Therefore STO's contribution is worth about $550m(being $450 for JV's and $100m other). So the pooled assets in ESG are being valued by the parties at $1550m. STO's share would be worth $750m. That is close to 50% and not much different to what David Knox has often spruiked about re STO's footprint in the Gunnedah Basin. ESG would make a share placement to STO to reflect the agreed valuation, and recommend this to shareholders for approval.

STO would then be entitled to representatives commensurate with it's shareholding, most likely with an independent chairman being agreed upon and having a casting vote.

2. The bigger, more robust ESG negotiate long-term CSG contracts with GLNG to enable it to secure project financing and scale up development.

The "new" ESG would have much greater credibility and negotiating power with governments, banks and customers. STO would hardly undercut ESG where it holds a 50% interest on supplies to GLNG or elsewhere where it's interest is less. GLNG ought to be happier knowing STO is a strategic shareholder in a key long-term supplier.

3. LNGN

As nice as this concept is the current ESG has next to no hope of bringing this project to fruition until such time as it has a major strategic partner. How much longer can it last without more cash being raised, let alone manage such a major project "from go to woah"?

Either it gets taken over completely in say the next 6 months or takes on a strategic partner. Again we get down to the "multi-party auction" or a strong strategic partner. Gladstone is where the near-term interest will come from and STO is the most likely strategic partner. Hence my view that value can be unlocked by recognizing intrinsic value and mutual best interests now..... and keeping options open for the medium to longer term.

So when and how might LNGN get going? I would argue it makes more sense when a much better estimate of proven resources and production processes is known. I also cannot see why STO would not be interested in LNGN once it is comfortable GLNG has adequate supplies for Trains 1, 2 and 3 say. Also I see it as essential that another strategic partner be brought into ESG at that stage. A major Japanese player is the obvious candidate. That way ESG would make a major share placement, raising big cash to enable it to supply gas and also participate as a JV partner in LNGN. This measure would also dilute STO's shareholding in ESG(e.g. from 50% down to say 30%).


4. Can this approach work?

A classic example is Woodside. It was a very small independent Aussie company sitting on resources with massive potential. It needed lots of time and money to realize that potential. Did it get swallowed up by greedy majors? No! But is was able to attract strategic partners in Shell and BHP along the way. They helped it pull off the initial NWS JV, stand side by side as an equal partner with some of the biggest companies in the world and still remain independent today. Have the early WPL shareholders been rewarded for their great patience? I think they have!

Sure the Fed and WA governments helped it along the way. The Feds and NSW ought to get totally behind ESG all the way as well. We are after all supposed to be the Premier State. Since BHP departed Newcastle and Wollongong what have we been left with? It's about time a new star was born... an Eastern Star! Make ESG the eastern equivalent of WPL.

5. What else is needed?

Many things, but two in particular.

ESG must take a much higher public profile. STO pooling it's NSW CSG interests into ESG and taking a larger stake will help enormously... but much more is needed. Is John Anderson the right person as ESG Chairman going forward? Is it a good idea for a politician to be in this type of role anyway, especially given the potential controversies associated with CSG and the vested interests involved. I'm no huge fan of Twiggy Forrest but it was a smart move of his to appoint Herb Elliott as Deputy Chairman, then Chairman of Fortescue early on. ESG should appoint highly respected Australians onto the Board, preferably from NSW, to help champion the cause. How much better would it be to have someone like Peter Cosgrove as Deputy Chairman or Chairman, and Steve Waugh as a board member... food for thought at least!

NSW politicians have to get 100% behind this. How long is it since we had a NSW Premier who had an affinity with rural areas? BOF ... this is your big chance! We love the fact that you get out and support the NSW SOO team and will be rightly celebrating with them after Wednesday night when we reclaim the series from the Cane Toads. But it is far more important that you get business investment and infrastructure moving again in this state. It's OK to promise families a $7000 bonus to sell up in Sydney and go bush but they must have jobs and a future for their kids to make that move. ESG is about the best hope there is on the horizon(.... that and the NBN). Most importantly, get yourself and your key people up to the Narrabri/Gunnedah area and find out first hand what the company and the residents are doing and need. The heartland of NSW extends much further than Penrith, Wollongong and Newcastle. CSG is where the jobs and royalties to underpin NSW's future will come from if you haven't already realized it.