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
latter.
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