wiseowl - says buy! - target $1.10

Main Points posted Only

Strong sentiment driving the coal seam gas sector has so far ignored UCG players such as Carbon Energy. However with the company renewing its commericalisation strategy towards lower capex production methods, perceptions may soon change. Carbon Energy is now focused on incrementally increasing production to supply domestic power markets rather than pursuing large industrial projects. This new ambition has been supported by successful production testing at its most advanced Bloodwood Creek project in Qld. Based on recovery rates and coal resources proven to date, the company estimates that its project’s contain energy resources of 2.89bn Giga Joules (GJ). These are not reserves, and third party certification is still required.

Should sentiment towards the east coast gas sector remain strong, and Carbon Energy’s underground coal resources be officially converted into gas reserves, the share price could experience a significant re rating. Carbon Energy appears to have been overlooked to date because unlike Coal Seam Gas (CSG), UCG has yet to be established as a commercial alternative for local gas production. However with recent production tests proving successful, this could change. Management have indicated that the upfront capex requirements for such projects are quite similar between the two technologies, yet UCG extracts much more energy. This is where the potential lies. The lack of near term earnings is a key risk as the company is likely to require more capital in 2010. However given the potential for the stock to be re rated towards current coal seam gas benchmarks, the balance of risks favours the upside, and we rate it a ‘speculative buy’.

wise-owl Checklist
Chairman has a track record of delivering shareholder value and new CEO has technical experience in the energy sector
$9m cash on hand and partnered with IPL to investigate project opportunities.
Conversion of coal resources to gas reserves following successful production testing could re rate the stock.
Major shareholders include Incitec Pivot Ltd (11.19%) and CSIRO (18.59%).
The stock appears to have made a bullish break from a downward trend.

After two weeks of testing, production of methane and ethane (the important gases) had reached a rate of 53GJ/day. Currently the gas is simply being flared (burnt off), but the company soon hopes to begin selling the gas and install additional production panels. Each production panel costs around $3m to install and can produce one million GJ per year. Depending on the sales price (current domestic average = $3GJ), payback for each panel should occur within two years.

After a 13 year downtrend, the stock reversed upwards in 2006. It has been trending upwards ever since, with pennant patterns that converge towards the trendline yielding solid rallies once broken on the upside. The last 3 upward pennant breaks have yielded short sharp rallies in the order of 200%, 390% and 430%, respectively (from trough to peak). After retracing back towards the trendline since June 2008, a rally over the last few weeks appears to have yielded another break. Resistance at 38c has been overcome and a repeat of past efforts would take the stock to new highs. On the other hand, a break of support at 19.5c would indicate a failure and potentially jeopardise the upward trend