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Coal Seam Methane is really just coming under notice and getting the attention it's long deserved. In the US it is a multi billion dollar business and for quite some time, as some know, I've been a strong advocate for Arrow Energy as they push on to being one of Australias prime suppliers of CSM, and this No Brainer will show in '06 why many people are riding it up. They are well placed geographically to provide gas at competitive prices into Brisbane and the story is a long growth one, with great upside in share price. They have expert management, great business plan and the operationall expert staff to execute that plan, they are well cashed up, great resource base with great expansion and al fundamentals are excellent.

Unfortunately the recent wet weather has hampered their progress but they are currently now in full swing.

Now that CSM is being seen by others as a viable alternative to conventional gas, many companies are entering the field e.g. CHX, ESG,MPO,ORG,QGC,STO,SGL, plus many junior explorers. AOE have the jump on them and their resource base is the best.

Patersons DCF valuation for AOE is $0.85 per share. They suggest that AOE has the largest acreage position in CSM in Australia, 3 development projects and 5 pilots underway. By farming down to CS Energy and Beach Petroleum, AOE have significantly minimised risk via framing-out a 40% interest to Beach Petroleum for $35m in development spend, while retaining flexibility to push ahead developments in other areas. Longer term, we suggest AOE offers best upside.

On a comparative EV/2P basis, AOE appears inexpensive.
AOE is well funded with circa $21m in cash, and BPT contributing $35m to earn a 40% stake in Tipton project.

Pattersons also say that :::-- "In our view, AOE and ESG have the potential to outperform for the following reasons.....very large resources in place, contracted gas sales and additional MOU's ( and ability to commercialise via power station assets), with the value upside to be determined by increasing production and resverves certification respectively.

We have used the implied EV/2P value for reserves in the ground of the listed entities.

This suggests that AOE probably represents the better value play in the sector, given it's large land bank, two projects currently under development, and pilot projects at 5 other locations. We prefer AOE over QGC as it has less funding requirements and more acreage."



WITHIN 18 months, Arrow Energy aims to become one of Queensland's main energy suppliers, with projected gas sales building to 16 petajoules per annum – or 12.5% of the state's gas usage, the company told last week's AGM.

By 2010, it plans to generate 45PJ per annum and be Australia's most profitable and productive coalbed methane producer, chairman William Stubbs told shareholders.

"Our progress to date has us well on the way to meeting that vision and we can look forward to the coming year with considerable optimism," Stubbs said.

He said 2006 would mark Arrow's full transition from explorer to producer, as it delivers first gas sales from the Kogan North field and starts development of its Daandine and Tipton West fields in the coming months.

"The Kogan North field has recently completed pre-commissioning of its facilities following an on-time and on-budget construction phase," Stubbs said.

"As we progress our development activity we plan to bring a further two fields, Daandine and Tipton West, on stream during calendar 2006."

Arrow is counting on "many more years of continued growth," due to increasing customer acceptance of the company and CBM, and eight other projects in the pipeline, Stubbs said.

But he warned that future challenges would be balancing the market's needs and supply potential with revenues, capital allocation and development.

The Kogan North project development was mostly funded by Arrow's joint venture partner, CS Energy, while Australian Pipeline Trust paid for the gas processing and compression facilities.

Stubbs said the company had made significant progress in raising capital for two other projects, after Beach Petroleum paid $35 million to farm-in to Tipton West and the $27 million funding arrangement with Alinta to build, own and operate the power station component of the Daandine project.

The company also raised $17.5 million in equity capital through a placement and entitlement issue to existing shareholders.

During the year, Arrow also secured gas sales agreements with CS Energy, Braemer Power, and Ergon Energy and a power purchase agreement with Country Energy.

"This has been a year when CBM has finally gained recognition from investors and customers," Stubbs said.

"Transparent, market-based values have been established through corporate transactions and the number of fields and companies delivering CBM into the market has continued to increase."

Regards,

Chas.