Power generator takes stake in east coast gas

INDEPENDENT electricity generator ERM Power has taken its first stake in the gas sector on the east coast, snapping up a 6 per cent stake in Metgasco, as a "hedging investment" against the widespread anticipation of rising gas prices.

By InvestSMART · 30 Sep 2011

By InvestSMART ·
30 Sep 2011

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ERM disclosed the holding yesterday, which is believed to have been picked up at about Metgasco's present share price. It closed trading yesterday at 32.5?, up 2?, valuing the company at about $135 million.

"The investment in Metgasco is a hedge against rising gas prices," ERM Power's managing director, Philip St Baker, said. "It's been a bit under the radar. We've done a fair bit of due diligence. It has conventional and unconventional gas, which de-risks the investment."

Analysts said the rising contention about coal seam gas, with concerns over access, had many investors on the back foot about investing in the sector, but with its reserves of conventional gas, this gave Metgasco another string to its bow.

"The conventional gas exposure is of comfort," one analyst said.

Concerned about the prospect for rising gas prices in Western Australia, due to booming export liquefied natural gas demand, ERM invested funds directly in two exploration plays there, now being developed.

"In Western Australia, gas prices have risen threefold in as many years," Mr St Baker said.

"We're going to see rising gas prices on the east coast when export LNG projects come on line from 2014-15."

Several export LNG projects are being developed in Queensland.

Metgasco is developing gas reserves around Casino, in the far north of New South Wales. It is reviewing piping gas to the Brisbane market, exporting gas directly offshore from northern NSW or participating in a project to export gas through the port of Brisbane.

It earlier signed a memorandum of understanding with Liquified Natural Gas Ltd to supply gas to its export project planned for Gladstone, in central Queensland.

Recently, Santos launched an agreed bid for Eastern Star Gas, whose NSW reserves centre on Narrabri.

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Frequently Asked Questions about this Article…

What stake did ERM Power take in Metgasco and why did it invest?

ERM Power bought a 6% stake in Metgasco as a deliberate ‘‘hedging investment’’ against the widespread expectation of rising gas prices. ERM’s managing director Philip St Baker said the holding was intended to protect the generator from higher future gas costs.

How was Metgasco valued when ERM disclosed the holding?

When ERM disclosed the holding, Metgasco’s shares closed trading at about 32.5 (up roughly 2), valuing the company at about $135 million, according to the report.

Why do analysts say Metgasco’s mix of conventional and unconventional gas matters to investors?

Analysts say Metgasco’s combination of conventional and unconventional gas reduces investment risk. The company’s conventional gas reserves provide extra comfort to investors who are otherwise cautious about coal seam gas and sector access issues.

Where are Metgasco’s gas reserves and what commercial routes is the company considering?

Metgasco is developing gas reserves around Casino in far north New South Wales. It is reviewing options such as piping gas to the Brisbane market, exporting gas offshore from northern NSW, or participating in a project to export gas through the Port of Brisbane.

What agreements does Metgasco have related to LNG export projects?

Metgasco earlier signed a memorandum of understanding with Liquified Natural Gas Ltd to supply gas to that company’s planned export project at Gladstone in central Queensland, linking Metgasco to Queensland LNG export development.

How could Queensland LNG export projects affect east coast gas prices?

The article reports that several export LNG projects are being developed in Queensland and that ERM expects east coast gas prices to rise when those export projects come online around 2014–15, increasing demand for domestic gas.

Why did ERM also invest in Western Australian exploration plays?

ERM invested directly in two exploration plays in Western Australia because gas prices there have already risen sharply—about threefold in a few years—driven by booming export LNG demand, and ERM was concerned similar pressures could affect the east coast.

What recent industry moves signal interest in NSW gas reserves?

The article notes that Santos launched an agreed bid for Eastern Star Gas, whose NSW reserves centre on Narrabri. That activity, along with Metgasco’s development plans, highlights industry interest in NSW gas resources.