"MPO has existing profitability through its coal seam gas joint venture interest with Origin Energy at Mungi in QLD. Origin Energy is the operator. The company has several other coal seam gas interests in NSW and QLD that are at various stages of evaluation. The most advanced is Harcourt/Bindaree, which is also a joint venture with Origin Energy. Origin Energy is the operator. Molopo has significant coal seam gas expertise in its own right..."
Coal-Seam-Gas – Sector Review Energy growth made to plan RN Equities Research − Coal-Seam-Gas − Sector Review 1 Issued by Wilson HTM Ltd ABN 68 010 529 665 - Australian Financial Services Licence No 238375 and should be read in conjunction with the disclosures/disclaimer in this report 25 January 2005 Andrew Pedler 07 3212 1346 Recommendation The coal seam gas sector in Australia is emerging as a flexible, clean and competitive new source of energy. Growth prospects are significant with Australian gas demand expected to grow at 5.0% p.a. compound over the next 5 years. Of the pure CSG plays, we recommend SGL (BUY), CHX (BUY), and QGC (BUY), reflecting both upside potential as well as absolute and relative value considerations. We also include SPEC BUY recommendations for emerging CSG companies AOE and MPO. [email protected] Keith Williams 03 9640 3802 [email protected] Key Points �� The coal seam gas sector is an emerging new player in Australia’s energy industry. �� Coal seam gas production is both flexible, being able to achieve a close match between demand and production growth, as well as offering environmentally clean gas at competitive prices. �� The potential gas resource base for the industry in Australia is very large. It compares favourably with total known conventional gas resources. �� The industry has two advanced participants with a pure coal seam gas focus, namely CH4 Gas Limited (CHX), and Sydney Gas Company Ltd (SGC). �� The sector also has a number of companies with projects at an earlier stage of coal seam gas development. The companies vary from early stage explorers, to companies which are evaluating pilot projects, have certified reserves, and may be approaching commercial production. We have divided these companies into two groups, emerging industry participants, and early stage participants. Companies in the former category are: Arrow Energy NL (AOE), Molopo Australia Ltd (MPO), and Queensland Gas Company Ltd (QGC). Companies in the latter category are: Comet Ridge Ltd (COI), Eastern Corporation Ltd (ECU), Eastern Star Gas Ltd (ESG), Planet Gas Ltd (PGS), and Sunshine Gas Ltd (SHG). �� Major Australian energy industry companies Origin Energy Ltd (ORG) and Santos Ltd (STO) also have coal seam gas interests, although their importance to the earnings base of those companies and the investment leverage to the sector is minor. �� When the several of the industry’s participants achieve full production in 2007, financial performances are expected to surprise, with both margins and return on equity expected to be comparable or better than those being achieved by the major Australian oil and gas companies. �� Our primary recommendations in the sector are: CHX (BUY), QGC (BUY) and SGL (BUY). Amongst the emerging and early stage industry participants we consider AOE and MPO to have the best fundamentals. We rate these companies SPECULATIVE BUY in each case. �� Potential share price upside for the advanced industry participant companies, based on the realisation of our potential upside case valuations is between 50% and 100%. Better than expected well flow rates which are now starting to become apparent in some fields, may yield further upside again. QGC has the greatest sensitivity to increased gas flow rates, of the companies currently under detailed coverage by WHTM.
Recommendations BUY Recommendation �� CHX: On the base case valuation, CHX is trading at a 15% discount to our base case valuation. Upside potential, based on our potential upside case is around 50%. CHX is an existing commercial producer. �� QGC: Trades at a slight discount to NPV, but additionally offers high leverage to better than expected well flow rates. It is well placed to access growth in the Eastern Australian gas market. Upside potential based on our potential upside case is in excess of 50%. QGC is considered to have the highest risk base case valuation of the three companies we have covered in detail, however it has the greatest leverage to higher well flow rates. �� SGL: Represents the cheapest of the two advanced industry participants (CHX, SGL) on the main valuation measures (NPV, PE, PCF, EV/EBITDA). The potential reserve base and hence future production capability is large, and SGL is considered to offer the highest upside potential. Our potential upside case valuation offers the potential for a return of 100%. SGL is an existing commercial producer. SPECULATIVE BUY Recommendation �� AOE: AOE has a large resource base which has the potential to support significant gas production. A firm gas sales agreement is in place for one project, and a number of conditional Memoranda of Understanding have been signed for gas off-take for others. Increased gas flow rates need to be demonstrated to achieve commerciality on one project. The company is in the process of optimising its hole completion technique at each of its pilot projects. Proved and probable (2P) reserves have been determined for one project and 3P reserves for a second project. �� MPO: MPO has existing profitability through its coal seam gas joint venture interest with Origin Energy at Mungi in QLD. Origin Energy is the operator. The company has several other coal seam gas interests in NSW and QLD that are at various stages of evaluation. The most advanced is Harcourt/Bindaree, which is also a joint venture with Origin Energy. Origin Energy is the operator. Molopo has significant coal seam gas expertise in its own right. While QGC and AOE are considered to be at a comparable stage of CSG development, our ranking of QGC as BUY, and AOE as SPEC BUY, is a reflection of our greater understanding and depth of coverage of the former compared with the
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