|Summary: Cooper Basin gas producers are basking in their best conditions in years, with rising domestic gas prices prompting the revival. Speculative market chatter has focussed on the potential for takeover bid for Santos after the SA Government removed the anti-Alan Bond takeover provisions covering Santos in 2008, but other smaller stocks are also experiencing dramatic price rises. We look at Strike Energy, Drillsearch, Beach and Senex.|
|Key take-out: The Cooper Basin, with its extensive infrastructure, has again become the hottest onshore oil and gas prospect in Australia.|
|Key beneficiaries: General investors. Category: Shares.|
|Recommendation: Outperform recommendation under review (Santos; Strike Energy; Beach; Senex and Drillsearch).|
It might be difficult to teach old dogs new tricks but that’s not the case with old oilfields because the revival of the Cooper Basin in central Australia is one reason for the sharp increase in the share price of Australia’s second biggest oil and gas producer, Santos.
Takeover chatter is another factor in the 11.5% rise by Santos in the 12 trading days since July 1 with two of the world’s oil majors, Chevron and ExxonMobil named as possible suitors.
A bid is possible, and has been at any time in the past five years thanks to the 2008 removal of shareholding restrictions applied by the South Australian Government after a failed takeover attempt by disgraced entrepreneur, Alan Bond.
But, a more likely reason for the rise in Santos’s share price from $12.40 to $13.94 (with the stock hitting a 12-month high of $14.27 last Thursday) is a fundamental re-assessment of the prospects of a company which I rated a buy on June 12 -- and continue to do so.
In that earlier report (Santos fires up on LNG, June 14) it was pointed out that Santos had a well-earned reputation for disappointing investors with a series of false starts and undelivered promises over the past 20 years.
This time, I argued, it was different because of the multiple growth projects which were moving towards fulfilment, including first production from two new LNG projects (Gladstone and Papua New Guinea) in which it has a minority interest and the largely unrecognised potential of the revival underway in the Cooper Basin.
My optimistic view of what’s happening in the Cooper Basin was reinforced by a site visit last month to Santos’s Moomba operations centre and a brief look at Australia’s first commercial shale gas well, Moomba 191.
Credit for the Cooper Basin being more of a driver behind the surge in Santos’s share price than takeover speculation is that it’s not the only player in the region to have enjoyed solid investor support over the past month – nor has it produced the best rise of the Cooper Basin stocks over the past two weeks.
That prize goes to Strike Energy (STX) which has rocketed up by 57%, admittedly off a low base of 7.3c on July 1 to recent sales around 12c, with the new-found interest in the stock entirely a “Cooper event” which involves the big industrial gas customer, Orica, signing a deal to buy gas which Strike hopes to discover in its Cooper Basin tenements.
Strike’s primary exploration targets are “gas-soaked coal seams” which might be a common objective in parts of Queensland and NSW (when permitted by government regulation) but are a relatively new geological goal in the Cooper Basin.
Under the terms of the deal Orica will pay Strike up to $52.5 million to fund a drilling blitz which it hopes will yield 150 petajoules of gas over the next 20 years, potentially saving Orica’s chemical factories from what is expected to be a severe increase in the price of gas in eastern Australia.
Similar deals by big industrial customers are becoming more common as Australia struggles to match the demands of LNG export projects which are chasing high gas prices in Asia with domestic gas demand.
Other rapid Cooper Basin movers since the start of the month include Drillsearch (DLS) which is up by 26% from $1.01 to $1.295, Beach (BPT), up 21% from $1.14 to $1.37 and Senex (SXY), up 18% from 58c to 71.5c.
* Graph depicts percentage moves. Source: Bloomberg
Drillsearch’s share price is being driven by a deal with Santos to explore for liquids-rich gas (so-called wet gas) in the western portion of the Cooper Basin.
Beach is being driven by a $400 million deal with Chevron announced earlier this year with the target being to expand unconventional gas (shale gas) discoveries with a major drilling program.
Senex is being driven by early success with a 30-well exploration program which include a report yesterday of multiple oil-bearing formations being intersected in the Worrior No.8 well.
What those different programs and different exploration targets tell investors is that new oil exploration and production technology developed in the U.S. is being applied with increasing success in discovering oil and gas overlooked or ignored in the first 50 years of Cooper Basin production.
In effect, the Cooper Basin with its extensive pipeline and processing infrastructure has once again become the hottest onshore oil and gas prospect in Australia.
Aiding the return to the Cooper Basin is political interference in the Australian energy market such as bans on coal-seam gas exploration under farmland and near towns, which is not an issue in the barren desert country of the Cooper Basin where there is minimal agricultural land use and no population centres. The bonus for Cooper Basin explorers is that high and rising east coast gas prices are overlapping perfectly with the technology revolution which has brought directional (horizontal) drilling, multiple well drilling off a single pad, and rock-fracturing (fraccing) to release oil and gas trapped in rocks once considered too tightly-packed to flow.
The overall combination of technology, energy-market changes, and a fresh look at the geology of the Cooper Basin, is the unleashing of a “land grab” which has seen big and small oil companies form joint ventures with Santos, Beach, Drillsearch and Senex the leaders in swelling pack of explorers.
For investors, Santos remains the best entry point given its combination of swelling profits from existing projects which are promising 6% annual compound growth in oil and gas output over the next seven years, rising domestic gas prices, an interest in two new LNG projects, and a leading role in the revival of the Cooper Basin.
Most investment banks which follow the stock have buy tips on Santos though some might be reviving their recommendations after the stock’s recent share price rise.
Credit Suisse and UBS, for example, had been tipping a $14 share price target for Santos over the next 12-months – a price exceeded last week.
JP Morgan, on the other hand, has recently raised its price target for the stock from $16.64 to $18.02. Merrill Lynch has a $16.56 price target, and Goldman Sachs has a price target of $16.35, as well as buy recommendation on the other leading Cooper Basin explorers with Beach said to be heading for $1.70, Drillsearch for $1.59 and Senex 79c.
Significantly, Goldman Sachs also argues in its latest research into the Australian oil and gas sector that the revival in the Cooper Basin is “still not fully priced” in the most active explorers in the region.
Factors which will continue to drive Cooper Basin stocks include exploration success, rising gas prices, extensive infrastructure connecting gas fields with big markets and the potential for unconventional gas adding a fresh leg to the life of a region which most investors had written off years ago.
Old dog, new tricks!