Coal seam gas: a warm inner glow

PORTFOLIO POINT: Investors are enjoying strong returns from coal seam gas stocks, a standout environmental sector.
The coal seam gas boom that began two years ago in Queensland shows no sign of ending. Not only is the coal seam gas (CSG) sector the standout performer among environmental stocks, it is now also one of the few sectors in the broader stockmarket that is still making positive returns for shareholders.

The latest in a now long list of recent coal seam gas action is a genuine bidding war for Pure Energy, between Arrow Energy and BG Group. BG Group had already made a market-shaking but unsuccessful takeover bid for Origin Energy and followed that with a successful bid for Queensland Gas, in the process picking up coal seam gas companies Sunshine Gas and Roma Petroleum. Pure Energy is not the only takeover play. Another active CSG acquirer, AGL Energy, is wrapping up its successful takeover of Sydney Gas by compulsorily acquiring the remaining few per cent of shares it had not already picked up.

Where does all this takeover activity and industry consolidation leave the coal seam gas sector, and what pure play stocks remain?

Pure Energy Resources

Pure Energy Resources (PES) has delivered windfall levels of capital gain for its shareholders, having traded in the 50¢ a share range for the early part of 2008 and at about $1.50 for the second half before shooting up to about $8.15 at the end of February this year.

The stockmarket hasn’t seen a real bidding war for some time but soon got one when Arrow Energy in late December made a cash and scrip bid for Pure Energy equal to $5.40 a share, valuing the company at $673 million. Arrow already held 19.9% of Pure Energy and its partner and shareholder Shell held another 14.9%.

On February 9 BG Group made a counter offer for Pure Energy, of $6.40 a share cash, and also announced it had a 9.7% stake in Pure Energy.

Two days after BG’s offer, Arrow raised its cash and scrip bid to $7.16 per share, valuing Pure Energy at $891 million. Six days later BG increased its all cash bid to $8 per share, giving Pure Energy a value of $995 million. Pure Energy recommended that shareholders accept BG’s offer and with acceptances from some key shareholders BG has 28.6% of Pure Energy.

Meanwhile, Arrow Energy advised Pure Energy shareholders not to accept BG’s offer as it is “continuing to assess its options”. It also pointed out that Pure Energy’s shares had traded above BG’s $8 offer, and that 9% of the stock had traded at an average price of $8.34. But Arrow made no immediate counter offer, and BG soon said it would pay $8.25 per share if it reached 90% of acceptances.

However, to do that it needs Arrow and Shell to accept its offer, which closes on March 23. Shell then said it would. Such price excitement has been a rarity in recent months, and the stockmarket is keen to see which bidder will win Pure Energy’s significant Queensland coal seam gas assets and incorporate them into its respective Gladstone coal seam gas to LNG project.

Meanwhile, shareholders who backed Pure Energy’s 2006 IPO at 20¢ a share are no doubt looking forward to a very hand return.

Arrow Energy

Arrow Energy is Australia’s largest pure play CSG company and is a member of the S&P ASX 100 index. The company is both a producer and explorer and has extensive CSG assets in Australia and overseas. It has four producing fields in Queensland, which produce more than 20% of Queensland’s gas, and joint venture exploration projects in Indonesia, China, Vietnam and India. With interests in three CSG power stations, it is also a producer of electricity and sold 615,368 megawatts in 2007-08.

Arrow has a strategic alliance with Royal Dutch Shell, with Shell having acquired a 30% interest in Arrow’s Australian tenements and a 10% interest in its international operations. The partners are planning a major CSG to LNG export plant at Gladstone in Queensland.

In another project, Arrow has extended its gas supply heads of agreement with Liquefied Natural Gas Ltd (LNGL), giving it the exclusive right to supply gas to a 1.5 million tonne per annum first LNG production train and an exclusive option to supply gas for a further LNG production train of similar capacity.

The final investment decision on the projects is targeted for the fourth quarter of 2009.

Arrow said it has an ideal solution with “a front-end plant with one or two smaller LNG trains of 1.5 million tonnes per annum each at Fishermans Landing and, through Shell’s initiatives, a large-scale plant to follow on Curtis Island where there is space for multiple, larger LNG trains.

“We are therefore targeting first LNG from Fishermans Landing in 2012 and later, larger quantities from a potential world-scale plant on Curtis Island. We believe this approach significantly mitigates the ramp up risk of CSG to LNG and will ultimately provide sufficient outlet for our 70 TCF of gross gas resource potential,” said the company.

LNGL recently entered into an LNG sales heads of agreement with Golar LNG Ltd – a world class global LNG off taker. Arrow said this was a major milestone for the Fishermans Landing project.

Golar and LNG Ltd will each take 40% of the equity in the joint venture and Arrow Energy has an option to take the final 20 per cent. The estimated development cost for the LNG facility is $US500 million.

In early February Arrow increased its gross 3P gas reserves by 61% to 3,676 petajoules, and gross 2P reserves by 20% to 1177 petajoules, after allowing for the sale of 30% of its tenement interests to Shell.

Arrow is financially healthy, with a half-year profit to December 31 of $241 million and net assets of $890 million.

Eastern Star Gas

Eastern Star gas (ESG) is an explorer and producer of coal seam gas and claims to have the largest CSG acreage in NSW. Its main field is at the Narrabri Coal Seam Gas Project at Narrabri in NSW, where it has a 65% interest and is the operator. The remaining 35% is held by Gastar Exploration Ltd.

ESG said its PEL 238 tenement is in the most lightly explored portion of the Bowen-Gunnedah-Sydney Basin complex which supplies the major part of Australia’s coal seam gas production. So far 2P gas reserves of 336 petajoules and 3P reserves of 1300 petajoules have been independently certified.

The company expects to generate further reserves in 2008-09. ESG said the test gas from production pilots will be connected to its 65 per cent owned Wilga Park Power Station, which will be expanded to take the production test gas in addition to gas currently supplied from ESG’s nearby Coonarah gas field.

Memoranda of understanding for the supply of gas from PEL 238 have been signed with Macquarie Generation for up to 500 petajoules and Babcock & Brown for up to 40 petajoules. The company also has an exploration farm-in venture at Moree in northern NSW. The farm-in areas are over 18,000 square kilometres to the north and west of ESG’s main exploration areas.

In January, ESG commenced trading on the International OTCQX (a new American trading venue for non-US stock exchange listed companies) under the code ESGLY. Twenty ESG shares represent one American Depository Receipt (ADR) on the exchange. In the December quarter ESG had negligible revenue and net operating cash flows of minus $8.1 million. Cash was a handy $27.1 million.

Metgasco

Metgasco (MEL) is a coal seam gas explorer in the Clarence-Moreton Basin in northern NSW. It has certified 2P reserves of 247 petajoules and 3P reserves of 1389 petajoules. These come from less than 5% of the company’s acreage. Metgasco says it has numerous opportunities available to it and its acreage is substantially under-explored.

The company’s two major projects are the development of the Stratheden Joint Venture with CS Energy, which has a 15% working interest, and development of the Richmond Valley Power Station. The Stratheden project aims to identify sufficient coal seam gas reserves to supply 18 petajoules a year to the Swanbank power station at Ipswich, near Brisbane. Trial production wells have been completed, and development work has commenced on the 145 kilometre Lions Way Pipeline to connect Casino in NSW to Ipswich.

The proposed 30 megawatt Richmond Valley Power Station will be capable of supplying electricity for 30,000 households in northern NSW. Metgasco has a non-binding memorandum of understanding with BP Australia for the sale of 15 petajoules per year.

The company is also examining the conventional gas potential of its fields, and has made a discovery at its Riflebird-E14 field. Metgasco had 2007-08 revenue of $1.1 million and made a loss of $2.1 million. In the December quarter it had net operating cash flow of minus $1.5 million and cash at the end of the quarter of $2 million.

Molopo Australia

Molopo Australia (MPO) recently sold its CSG assets at Gloucester in NSW to AGL, but retains CSG assets in Queensland – 50% interests in four gas prospects in the Bowen Basin as well as a 43–46% interest in an exploration field in the Clarence-Moreton Basin in NSW.

The company said the Mungi prospect in Queensland has a very large gross gas resource of about 7500 billion cubic feet, of which 40–50% may be commercially recoverable. Molopo is producing and selling CSG from the Mungi Field and will soon complete the third new horizontal production well.

Molopo’s objective is to establish commercial gas production rates from the new wells sufficient to trigger full-scale development. Molopo also has a 17.15% net interest in a CSG project in China, which was recently designated a State Science and Technology Significant Project. The sale of its interest in the Gloucester project gave Molopo $111 million in cash and placed it in a strong financial position with $120 million in cash, said the company.

However, Molopo is not a pure CSG play. It has three core projects. The other two are a natural gas exploration project in South Africa and a shale gas project in Canada. Another gas project is in the US. Chairman Don Beard said: “In Queensland we expect the work program to establish material increases in production, reserves and revenue. In Quebec, if we are successful in our exploration efforts, the possibility exists for a large scale shale gas resource with the potential to generate more value than any other project in the company’s portfolio.

“With wells planned in South Africa, China and the remaining New South Wales assets, shareholders can look forward to an exciting 2009.”

Molopo had a net operating cash flow in the December quarter of minus $6.1 million, but because of the sale of its Gloucester interests expects to make an interim half profit of $90–100 million.

Meanwhile, with plenty of cash available the company will buy back 10% of its shares over the 12 months to February 2010.

Greenpower Energy

Greenpower Energy (GPP), which listed on the ASX in March 2008, is a coal seam gas explorer with tenements in the Perth basin in Western Australia, the Gippsland and Otway Basins in Victoria, the Gunnedah Basin in New South Wales, and the Willochra and Eromanga Basins in South Australia.

The company is exploring these permits but at present it has no revenues and at the end of the December quarter had cash of $1 million.

Blue Energy

Blue Energy (BUL) is a CSG explorer with numerous permits in the Bowen and Galilee Basins in Queensland and three key areas identified for development. Blue Energy has said it aims to be a profitable gas company within three years.

However, it is not a pure-play CSG business. It has oil as well as natural gas interests in Queensland and South Australia and in Papua New Guinea, where it said recent studies have “identified the potential of a previously unrecognised oil play within the permits”.

Victor Bivell is editor of Eco Investor, in which this article first appeared.