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CGS stocks losing their steam CRITERION: Tim Boreham From: The Australian February 03, 2010 12:00AM Increase Text Size Decrease Text Size Print Email Share Coal-seam gas COAL-SEAM gas stocks are being discarded faster than a trinket from a Christmas bon-bon, although it's hard to nail why the sector has fallen from favour, if only temporarily.
One CSG watcher blames an "unfortunate confluence of a range of factors", including lower global gas prices and some failed offtake deals.
A stark example of collateral damage surfaced yesterday: contractor WDS (WDS, 69c) revised its full-year profit guidance to a mere $7 million, with a break-even first-half result. Last October, management expected $22m- $24m, compared with the actual $20.3m in 2008-09.
WDS shares tumbled 82c, or 54 per cent.
While WDS is involved in mining and infrastructure work, the monster downgrade is attributed to the slower-than-expected development of CSG projects, as well as aggressive bidding.
According to WDS chief Gareth Mann, the downgrade relates not so much to the big-ticket LNG expansion projects, but to the domestic side of the CSG game (CSG provides about 10 per cent of eastern seaboard gas). Mann says there's a GFC hangover effect: "We are not seeing many new projects coming to the market and they are bid aggressively by a wide range of players."
We heard a similar yarn on Monday from driller and constructor AJ Lucas, which cited slow work in its "principal domain" of CSG projects.
Meanwhile, Arrow Energy (AOE, $3.73) has been hit by funding concerns about its Fisherman's Landing LNG project, but the shares partly recovered yesterday after the Shell-backed entity went some way to assuaging these doubts.
Less developed players to incur the market's wrath include Icon Energy (ICN, 30c) and MEO Australia (MEO, 39.5c).
South of the border, everyone overlooked a cracking reserves upgrade from Eastern Star Gas (ESG, 78.5c), which boosted the proved and probable reserves of its flagship Narrabri project by 152 per cent, to 1520 petajoules.
On balance, the sell-off looks to be a healthy pause and an excuse for the true believers to stock up on their fave exposures. In our view, Arrow is a speculative buy, if only because it's been reliably trading between $3.50 and $4.50. Don't expect those Shell takeover rumours to resurface in a hurry.
Eastern Star Gas, which claims to have the biggest gas reserves in NSW, is a speculative buy.
Icon shares have lost half of their value since September and are worth a spec buy, given that it's backed by utility Stanwell Corp.
We'll risk WDS as a spec buy at these knocked-down levels.
The CSG sector accounts for only 16 per cent of the company's revenues, with the rest derived mainly from conventional oil and gas (27 per cent) and coal (27 per cent). The safer and less exciting CSG entree is by way of the diversified gaseous giants Santos (STO, $12.97) and Origin Energy (ORG, $16.19), whose CSG efforts are funded by deep-pocketed partners.
While we're on it, we'll also reinstate Woodside (WPL, $43.20) to the buy list after last year demoting the stock to a sell at $49.36 in December.
