Argonaut Algorithm: The sun rises in the east, and so do ASX gas opportunities

Argonaut Funds Management’s David Franklyn joins Stockhead to share investing secrets from the high-conviction resource sector investing fund, including his junior stock pick of the month.

The largest gas players in Australia are typically concentrated in WA and Queensland, the resource powerhouses of the commodity-rich nation.

But it’s an emerging crop of junior energy companies in Victoria’s Gippsland and Otway Basins that are catching the eye of fund managers as Australia grapples with the reality it’s about to run short of gas.

That concern has become even more pronounced in the past year as federal bodies have grown increasingly concerned about the outlook for the east coast energy market.

A shortfall could emerge as soon as Q4 2025, with a risk of a shortfall in each quarter in 2026 if LNG producers export all of their uncontracted gas, the ACCC warned in June.

And supply lines out of the southern states are waning. By 2027 87% of domestic gas supply accessible to states in the NEM will come from Queensland, rising to 96% of all gas produced on the east coast by 2037.

Amid that backdrop and a shift to embrace gas in energy transition scenarios, Argonaut Funds Management’s David Franklyn says there has been a reinvigoration of exploration activity in Victoria’s offshore gas fields.

With prices rising from $5/GJ a few years ago to between $12-14/GJ today, demand is running ahead of supply and Franklyn says a discovery that could be plugged into the grid from the southern states would make ‘good money’.

“Gas is a pretty small component (of the national electricity market) and if you look in Victoria, and this is where the particular opportunity is, you can see gas has really been squeezed out by government policy,” he said.

“And so that’s really the opportunity is the way it looks now is there’s a big and emerging gap between demand and between supply and that’s forcing up prices.

“If you can produce gas cheaply close to the market in Victoria and put it into the NEM then you’re going to make really good money.”

The outlook for ASX energy

While gas prices have been going up, the ASX energy sector has trailed its competitors in the ASX 200, ASX 300 Resources and especially the gold index, in recent times.

“There’s been a lot of other places to invest. If you look at the ASX 200, it hasn’t been a lot of joy. (The best energy performer) Deep Yellow (ASX:DYL) is obviously uranium, Santos (ASX:STO) is only up 11% and it’s under proposed takeover, Karoon’s (ASX:KAR) been pretty flat, nothing much happening there,” Franklyn said.

“Even with the bottom performers, you’ve got Woodside Energy Group (ASX:WDS) down 3%, Beach Energy (ASX:BPT) down 4%.

“They’re totally out of favour, they’ve been sold out, there’s not a lot of interest, and if you look at the small end of town it’s even worse.”

But the world is often darkest before the dawn, and the underperformance of energy stocks could well become a reminder that sold-off sectors can bounce back.

“Don’t get too despondent that your shares are down over the last 12 months, because the stocks and the sectors that underperform are often the better performers in the future,” Franklyn said.

“There’s a counter-cyclical element here and I think the east coast gas market is a really good way to play that.

“Gas prices are going up, and we’re at a really interesting stage where you’ve got Amplitude Energy (ASX:AEL), Beach, 3D Energi (ASX:TDO) all doing significant drilling campaigns over the next three or four months, and then next year you’ve got Emperor Energy (ASX:EMP) in the Gippsland Basin, which has also a big highly prospective drill.

“I just think you could see a whole lot of interest come back into the sector.”

Those upcoming drill programs mean there are a number of juniors in Victoria leveraged to exploration outcomes, with Franklyn viewing most of their wells as having a “pretty high chance of success”.

“Oil and gas is here to stay. What’s happened particularly in Victoria and New South Wales is the govermments have gone against oil and gas as part of their energy transition,” he said.

“They’re now running out of gas and there’s a reinvigoration of exploration activity, particularly in the Otway and Gippsland Basins.

“I think if you see a major discovery it can be connected into the grid pretty quickly.

“All those stocks are still relatively cheap and sort of unknown apart from Amplitude.“

Argonaut’s stock(s) of the month

With that in mind, Franklyn finds it hard to split Emperor Energy (ASX:EMP) and 3D Energi (ASX:TDO) for his stock of the month.

$47m capped Emperor is up close to 87% in the past six months and charged another 12% higher on Monday.

It recently started the farm-in process for the Judith-2 Appraisal Well, which will target the Judith Est 2C Contingent Resource of 166 billion cubic feet and Judith East (Deeps) P50 Prospective Resource of 142Bcf.

Successful drilling could result in a 2P Gas Reserve of as much as 308Bcf. Even more opportunity could be opened up with a sidetrack drill into the Northeast fault block and an additional 364Bcf indentified P50 Prespective Gas Resource if that works out.

The Judith field, which will be drilled in mid-2026, is just 12km from Exxon and Woodside’s Tuna Platform and 40km from the onshore Orbost Gas Plant owned by Amplitude.

Its plan is to access a Valaris 107 jack-up rig operating nearby in the Gippsland Basin.

“It’s still a very small market cap and it’s not without risk. So it’s not for the faint of heart but we see it as a really good opportunity,” Franklyn said.

3D Energi, meanwhile, has a best estimate prospective resource of 400Bcf at its VIC/P79 permit and 762Bcf at T/49P in the Otway.

It’s a 20% owner of both, with the risk shared by 51% majority owner and operator ConocoPhillips and 29% owner the Korea National Oil Corporation.

And US major ConocoPhillips will be on the hook for the US$65m well carry in the first phase of exploration drilling. One well is expected to be drilled in mid-October with another to follow in November.

A second phase of four optional exploration wells is contingent on Phase 1 results. Should drilling at the “Charlemont Cluster” be successful it could establish a resource equivalent to six years of Victoria’s current gas demand, the company said in a recent presentation.

Capped at $45m with a 14c share price, Euroz Hartleys analyst Declan Bonnick recently initiated on TDO with a 24c price target and spec buy rating. Its shares are 40% higher YTD.

Argonaut Funds Management is a high conviction resource sector investor managing the Argonaut Natural Resources Fund and the Argonaut Global Gold Fund. David Franklyn is the Fund Manager for the Argonaut Natural Resources Fund.

The views, information, or opinions expressed in  this article are solely those of the interviewee and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.