With Galilee Energy ticking the boxes at its Glenaras gas project and securing options for a long-term path to market, Taylor Collison sees the company potentially on the verge of a re-rating.

 Taylor Collison has initiated coverage on emerging gas producer Galilee Energy (ASX:GLL) with a net asset value of 91c per share, or $309m, and recommending it as a “speculative buy”.

That’s over 3x Galilee’s current share price of 28c.

Galilee Energy (ASX:GLL) share price chart

Analyst Andrew Williams said in a research report released this week that the most valuable asset to own in the energy space was gas in the commercial definition/pre-development phase, particularly with an open-ended carbon offset project.

That’s because of the critical supply constraints being faced by the east coast market right now.

“Galilee Energy can tick these boxes – resource is not the problem, market is not the problem, carbon offset won’t be the problem. There is a project here to deliver,” Williams said.

Galilee recently negotiated a non-binding memorandum of understanding with leading Australian energy infrastructure provider APA Group (ASX:APA) that could potentially link up the company’s Glenaras gas project with the gas-short east coast markets.

APA – which has a portfolio worth $21 billion of gas, electricity, solar and wind assets – delivers around half of the nation’s gas usage.

Galilee is making substantial progress at Glenaras, saying in a recent operations update that it continues to observe strong pressure depletion from the pilot wells, with pressure at its lowest level at the pilot so far.

“Gas rates are building, the threshold rate for commerciality is falling and the company is looking to deliver initial ‘P’ reserves in early ’23…the re-rating point is approaching,” Williams noted.

“With a secured path to market, the business case for GLL is more robust and now just needs ‘the flow rate’ to underpin 2P reserves.

“A success case at Glenaras would result in a material unwinding of risk weightings and re-set of the economic base cases, delivering potentially transformative upside, likely well in excess of our ascribed valuation, unlocking the value on a greater resource.”

Williams estimates that for every $1 per gigajoule change in the gas price, the Galilee Energy value would move by ~7c per share, or around $20m.

The Glenaras project has one of the largest certified, uncontracted contingent resource positions on the east coast of 2,508 petajoules (or about 2.4 trillion cubic feet) of gas.

Galilee’s immediate focus is on converting this contingent resource to a maiden reserve, which is on track for release in early 2023.

Market screaming for supply

Williams said the demand for gas remained high and finding a gas market would not be an issue.

“We maintain our positive view of the Eastern Australia gas investment thematic on critical supply and capital constraints,” he said.

“Supply issues continue to support high short-term prices and anecdotally, discussions on new contracts point to increasingly more favourable terms to the supplier from here.

“The gas market is short, and the investing market is short options to play the strongest macro dynamic.”

This article was developed in collaboration with Galilee Energy, a Stockhead advertiser at the time of publishing.

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

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