Hey all,I've been a follower of Hot Copper for a while and have...

Hey all,

I've been a follower of Hot Copper for a while and have yet to post anything. Curious as to what you all think regarding VEN's intrinsic value... Here is my estimate below. Please do your own research as I am only a hobby/retail investor. This is my opinion only.

My Valuation

If you follow oil and gas companies, you will know how unusual it is for an explorer to experience three successful discoveries in a row. Yet this is exactly what VEN has achieved. Vintage's current discoveries can be segmented into three discoveries as follows:

1. The Vali gas field in the Cooper Basin

2. The Odin gas field in the Cooper Basin
3. The Nangwarry CO2 discovery in the Otway Basin

1. The Vali gas field in the Cooper Basin
Vintage has already successfully drilled two wells in the Vali field (Vali-1 and Vali-2). VEN has proven (2P) resources in the Vali field which could cater for up to 9 wells with average flow rates of 5 MMscfd each. Neil Gibbins - MD at Vintage believes the second well could result in an increase in 2P resources once evaluated due to large gas shows and good wireline logging results. For the purpose of valuation, I place the chance of success (COS) of three Vali wells at 80%. I have excluded other potential wells (Vali 4-9) from the valuation, as I believe they may not come into play for at least a few years.
2. The Odin gas field in the Cooper BasinThe first well in the Odin gas field (Odin-1) was only recently drilled. The company has yet to certify any 2P reserves, but management noted the strong gas flows indicated a similar amount of gas to the Vali wells. The company may choose to drill the second Odin well shortly to ensure right-sizing of infrastructure before commissioning a pipeline. For the purpose of valuation, I place the chance of success (COS) of Odin-1 at 50% and Odin-2 at 30%.

3. The Nangwarry CO2 discovery in the Otway Basin This is the most exciting discovery and seems under the radar for many investors. Management stated in recent ASX announcements they believe the CO2 discovery features a purity level of 90-99% and a field size of 25-80 Bcf. That equates to a field life of 23-73 years at a flow rate of 3MMscfd (or 150 tonnes of production per day, 365 days per year). This volume of CO2 could potentially supply 10% of Australia's entire CO2 market - which is clearly significant.But you may be thinking... CO2 is a bad thing right? Aren't we trying to reduce the CO2 produced around the world?Although it is true we are trying to reduce the CO2 emissions from industry and the burning of fossil fuels, high purity CO2 deposits have a different purpose. While CO2 can be distilled from the air, the method is too expensive an inefficient. Commercial grade CO2 is generally produced as a byproduct of natural gas processing, ammonia production, and ethanol fermentation. The higher the purity of a CO2 well, the less processing required for the CO2 to be considered commercial grade. This is what makes Nangwarry such a significant discovery IMO.

A CO2 shortage may be imminent
Many articles can be found online about the worldwide shortage of food-grade CO2. I've posted the links to some at the bottom of this post for your reference. For example, a recent article by Australian Food News on 27/05/21 stated "Australia is presently suffering a severe shortage of CO2 required for soft drinks to bubble." The shortage in Australia is also exacerbated by the closing of the Caroline-1 well in 2017. The Caroline-1 well was discovered in 1960 and produced high purity CO2 for 50 years. This asset was owned by the SA government and generated 800,000 tonnes of gas over its productive life.

The Price of CO2
Current pricing of food grade CO2 is hard to come by. I've had no success in finding pricing data. However, in a recent interview Vintage management stated the price per tonne received by the SA government for the Caroline 1 well was around $300/tonne. If we were to assume the same pricing for the Nangwarry discovery we would be looking at revenue of approximately $16.5m per year (50% net to Vintage as part of the JV with Otway Energy). Due to the current shortages of CO2 in Australia and around the world I believe this discovery has a high chance of development (COS) of 80%.

One of the key barriers to commercialisation may be the cost of infrastructure needed to build a plant to process the CO2 from the well. However, with a shortage of CO2 looming and such a big field on offer, I doubt Vintage will have difficulty finding interested parties to fund the development. Perhaps this could work as a JV with a company such as Supagas or Airliquide? Alternatively, Vintage could sell the asset at a large profit.I've added the link to the interview with Neil Gibbins where he talks about the Nangwarry discovery at the bottom of this post. I suggest you check it out for yourself for more information.

Intrinsic Value

I've broken my intrinsic value for Vintage down into individual discoveries. I have assigned a probability of commercialisation to each discovery to factor in the risk of failure to achieve commercialisation. Finally, I deducted a 30% margin of safety from my total valuation estimate.

1. The Vali gas field in the Cooper Basin

Vali-1 well - $0.10 @ 80% COS

Vali-2 well - $0.10 @ 80% COSVali-3 well - $0.10 @ 80% COS

2. The Odin gas field in the Cooper Basin

Odin-1 well - $0.06 @ 50% COSOdin-2 well - $0.03 @ 30% COS
3. The Nangwarry CO2 discovery in the Otway Basin

Nangwarry-1 well - $0.09 @ 80% COS

Total Intrinsic Value = $0.48Less margin of safety (30%)

Intrinsic Value including margin of safety = $0.37 per shareThis would represent a discount of 516% on the current share price. It also leaves potential upside from future Vali wells.

Looking to the Future

In Neil Gibbins recent interview with Small Caps he is asked what VEN investors can expect in the coming 6 months. His answer? Resource upgrades, gas contracts, infrastructure builds, and more. The company plans to raise capital required to reach cashflow generation without diluting shareholders further, with first cashflow from the gas fields planned for first half of CY 2022. First production from Nangwarry is likely to take a little longer - say 12-18 months. But this really isn't long to wait for a company with such exciting prospects and a deflated share price.

Assumptions

• I have used a gas price of $10/GJ for the East Coast gas market. This is in line with Beach Energy's forecasts (see link below).

• I am assuming a PE ratio of 8 (a lower than ASX average due to investors dislike for fossil fuel related stocks)

• I am assuming a CO2 price of $300/t

• The COS for each project is based on my opinion only. Any or all of these projects may fail to commercialise in reality

• I believe my COS for Vali and Odin are reasonable considering the two fields are so close to each other and existing gas infrastructure. It would be simple and cost effective to connect in to Santos operated Beckler Field (see Figure 1)

• I've based my valuation on a 8 times earnings ratio (assuming all 5 wells and Nangwarry come online within 2-3 years. A DCF model based on this same exercise achieves a much higher valuation, mainly due to the long productive life expected from Nangwarry. I chose to value the company using the PE method to reach a more conservative valuation and leave room for future upside.

All information in this post is my opinion only. Do your own research before making any investment decisions. Disclosure: Held.