why arrow energy will be a winner.

Read the Fat Prophets report below and you will know why we are on a winner. The thing what I love about Arrow is they have 70 million cash in the bank to advance their projects and their projects are looking great. They are allready making money and have excellent International projects in India which will advance this year. Fat prophets in their write up below tells you why the believe ARROW should be worth more than QGC. QGC have been offered 1.80 per share for their company by SANTOS and there are more shares in QGC than what ARROW have on issue and ARROW also have 3 times the amount of cash at Bank. Based on the takeover value for QGC arrow should go to $2! That would be a fair value. I hold 20,000 arrow and even though they havnt been as exciting as the others they have been way more stable than the others. Im holding untill I get my $2+. I will probably hold even further because this company could be huge.

Arrow Energy Hold AOE

Fat Mining 46, 18 Oct, 2006
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Dynamic growth plans continue

$453 million

Not content with the dynamic changes in its business that have already taken place so far during 2006 and which we highlighted in our most recent report, Arrow Energy has outlined further plans to grow its gas business, both domestically in Queensland and internationally. The company is embracing gas to liquids opportunities that would give it exposure to higher value products, as well as expanding its gas development initiatives into India. We regard Arrow as now not only the pre-eminent force in the Queensland gas market, but an emerging international coal seam gas player. The share price re-rating that we predicted in our most recent report is well underway.

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"Arrow continues to represent a tremendous long-term growth story in the energy-hungry market of southeastern Queensland."

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Fat Prophets originally recommended buying Arrow Energy around 75 cents in November (Fat Mining 2). Our last review of this stock was during September (Fat Mining 41).



A steady acceleration of the upward trend during October has seen Arrow break decisively higher, reflecting strong investor support. The rally has clearly exceeded the prior all-time high of October 2005 at 77.6 cents, reaching a new all-time high of $1.015 this week.

Following gains of more than 55% in just three weeks, the upward trend of any stock would be at risk of pausing for consolidation. However, at this stage Arrow is not displaying any significant signs of rally fatigue. We believe that any correction in prices will be short lived with support between 82.5 cents and 77.6 cents limiting downside risks.

Given the steady momentum behind the revival of the longer-term upward trend, we believe the outlook for Arrow remains positive. In coming weeks we expect to see the rally extend further, achieving new highs beyond $1.015. Accordingly, Arrow will remain held in the Fat Prophets Mining and Resources Portfolio.



A number of factors are converging to drive even more interest in the Arrow Energy story. Hot on the heels of its recent merger with fellow Queensland coal seam gas (CSG) producer, CH4, to create Australia's largest independent CSG producer, sector heavyweight Santos has heightened interest by announcing a hostile takeover bid for Queensland Gas. The directors of Queensland Gas have rejected Santos' offer and it appears a drawn out struggle may develop.

What all of this does of course is highlight the value in our CSG sector favourite, Arrow Energy. As we highlighted in our most recent report on Arrow Energy, the merger with CH4 not only eliminated competition between two similar companies in the same gas market, but it also provided both immediate and longer-term benefits for Arrow shareholders.

The impact of the merger on Arrow's operations is both immediate and dramatic. Compared to the same period a year ago, Arrow has boosted its net production from zero to 25 Terajoules (TJ) a day and boosted its portfolio of emerging and producing gas fields from 11 to 19. It now holds 80,000 sq km of tenements in Queensland, making it the leading CSG-focused landholder in the state.

There has also been a dramatic increase in Arrow's market value from $110 million to around $450 million, while it has raised its 2010 annual gas production target from 35 Petajoules (PJ) to 55 PJ, which will generate an estimated $140 million in annual revenue.

Arrow currently has two operating gas projects, Moranbah and Koga north, with a further two (Daandine and Tipton West) under development and fully funded. These projects supply a quality customer base comprising CS Energy, Enertrade, BP, Ergon, B&B and Country Energy.

The location of these projects allows Arrow to build its business around existing infrastructure in Dalby, creating a regional energy hub that can supply the southeast Queensland energy market. The merged group now supplies 15% of Queensland's gas needs, which will increase to 25% in 2007 following the recent signing of a 45 PJ p.a. gas supply agreement.

One of the primary benefits of the CH4 merger, in our view, is the aspect of maximizing operating margins. As well as eliminating price competition between the two companies, the merger should help Arrow boost margins at a time of strong competition for market share in Queensland that has tended to subdue gas prices. Arrow estimates its future operating margins at around 60%.

Financially, the balance sheet position of the merged group is sound, with $25 million of cash and un-drawn debt facilities of $15 million. The exercise of 75-cent options expiring in December 2006 could provide further funds of $67 million.

Arrow has aggressive plans to grow its business through prioritized development of up to 15 appraisal projects, which could deliver more than 50 PJ of net gas within three years. Obtaining 2P (Proven & Probable) Reserve certification status for these projects is the goal, which would then allow: the supply of gas from Moranbah to Gladstone; achieving critical mass for coastal Queensland gas supply; and the potential supply gas direct to mine sites.

Arrow is also looking at gas business opportunities in energy hungry markets in Southeast Asia, particularly India, China and Indonesia. All of these countries have enormous reserves of CSG for exploitation, with gas prices being between two and four times higher than those in the Australian market. Effectively, Arrow will utilize the intellectual property gained through its successful Australian gas developments to pursue more lucrative overseas opportunities.

An Arrow-led consortium recently successfully bid on three CSG blocks in India, in conjunction with major partner GAIL, Tata Power and Energy Infrastructure Group. This is effectively the first step in the company's strategy of expanding internationally.

The attraction in doing so lies in the fact that current gas prices in India are in the range of $7-$10 per GJ, which compares with the average of $3-$3.50 per GJ in Queensland. To put this into perspective, a 35% stake in 20 PJ per annum of gas sales in India could generate $50 million of additional revenue for Arrow. India is set to emerge as the fourth-biggest user of energy globally by 2010. Exploration activity in India will begin in 2007.

GAIL meanwhile is contemplating making a substantial capital investment in Arrow's Australian business, with a decision expected in the December 2006 quarter. GAIL is 55%-owned by the Indian government and is the country's principal gas transmission and marketing company.

Arrow is also pursuing possible gas-to-liquids production opportunities, with the aim being to enhance its operating margins by gaining more exposure to the underlying price of oil. The rationale for this is that oil and oil product-equivalent prices are around five times the price of simple gas in the Queensland market. Arrow would therefore like to sell gas in a form or a location where it is competing with the oil price.

Arrow recently entered into an agreement with Alcan to undertake a feasibility study into a Gas-to-Liquids (GTL) project in Queensland. GTL technology has been around since the 1940s and could potentially supply a very high-end distillate such as diesel for use at Alcan's Gove alumina refinery.

Arrow has assembled a highly experienced management team. The line-up includes John Reynolds, who was the former Chairman of CH4. He will be Arrow's Chairman and has directorial experience at the Bank of Queensland and Queensland Cotton. Nick Davies will remain as Arrow's CEO, with 27 years experience in the oil and gas business.

New Hope Corporation, which is a major domestic energy coal producer, acquired a 19.9% stake in Arrow from Macquarie Bank recently. Following an invitation from Arrow, New Hope has appointed its own representative to the board.

With regard to a broad earnings outlook, we anticipate Earnings per Share (EPS) of 2.5 cents in 2007, increasing to 4.5 cents in 2008. We regard these as conservative estimates, as they do not account for other significant production opportunities that could materialize in what is a very rapidly changing landscape.

Corporate activity in the resources sector is increasing and the CSG sector is no exception. Santos recently announced a hostile $606 million takeover bid for Queensland Gas. A close inspection of the bid shows that Santos is paying A$1.38/GJ of 2P reserves, based on QGC's current 2P reserves of 423 PJ.

By comparison, Arrow's own 2P reserves are 498 PJ, yet Arrow's market value is just $450 million. We believe that valuations based on 2P reserves alone are not an appropriate way of valuing CSG companies, as they do not accurately reflect the potential upside from commercialization of overall 3P reserves, but the exercise does provide an interesting comparison and highlights Arrow's fundamental value. Furthermore, Arrow beats QGC in terms of 2P & 3P reserves, current and forecast production, contracted gas sales, producing and developing projects, as well as boating tremendous partners in GAIL and Tata.

We remain convinced that the now-enlarged Arrow Energy will provide numerous strategic benefits in terms of growing its gas business, while simultaneously reducing risk. There is now a whole host of growth options internationally, as well as in the existing Queensland domestic gas market. It remains a strong growth company in our view and has the potential to generate further strong capital returns for Members.

Arrow Energy will remain held in the Fat Prophets Mining & Resources portfolio.

PLUS THIS HAS HAPPENED SINCE THE MESSAGE FROM FAT PROPHETS

Now you have to take into account they have aquired a 50% ownership in Global CBM pty ltd which will now be renamed to Arrow Global CBM pty ltd.

"Global is in the advanced stages of business development for the acquisition of coal bed methane (CBM) assets in Indonesia, China, Vietnam and India."

The other assets the have exposure to in Indonesia are

"Arrow Energy has reached an agreement with Sugico Graha, PT (Sugico), which provides Arrow with an option to farm-in to twelve of Sugico’s tenements in South Sumatra, Indonesia to earn up to a 65% interest in each."

So what valuation can we put on Arrow?