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Oil and gas explorer Real Energy could be worth 22c a share according to new research from analyst Hunter Capital Advisors.

The price target was based on converting prospective gas “resources” into “reserves” at Real Energy’s ATP 927P exploration project in Queensland’s Cooper Basin.

A resource is an estimate of how much oil or gas is in a deposit. A reserve is a commercially recoverable volume that comes after exploration and testing has been completed.

Real Energy (ASX:RLE) owns two exploration permits in the Cooper Basin, which is one of Australia’s most significant on-shore oil and gas reserves.

Chief executive Scott Brown says this ultimately means Real Energy is a takeover target.

“If we can convert contingent resources into reserves, which have a higher rating in the petroleum score, investors generally re-rate the company,” he told Stockhead.

“Because the [east coast] gas market is very tight, if we have gas reserves a lot of people will be prepared to pay for accessing that.”

Possibility of higher gas resources

Hunter Capital Advisors director Jean François Bertincourt says there’s a possibility of slightly higher “2C” contingent gas resources of 276 billion cubic feet in Real Energy’s Tamarama 1 and 2 wells.

“There is a very high probability for the company to convert its current 2C (276 billion cubic feet) and 3C (672 billion cubic feet) resources into 2P and 3P gas reserves within the next 12 to 18 months.”

A 2C resource is a best estimate of how much oil or gas is in a deposit. A 1C resource is a low estimate and a 3C is high. A 2P means it’s proven and probable, while a 3P includes “possible”.

Down the track Mr Bertincourt is predicting even bigger gains.

“As the company matures its 2C resource into reserves we believe the stock will re-rate with the valuation increasing to 42c a share,” he said.

“This view is further strengthened by the proximity of the permit to extensive gas transmission pipelines and the current economic and political climate for gas demand.”

Picture: Real Energy
Real Energy’s Tamarama-1 well. Picture: Real Energy

Permits prove their worth

Real Energy latest test well in the Cooper Basin is Tamamrama 1, which taps into the Toolachee and Patchawarra sandstone formations in the ATP927P permit area and is part of its Windorah Gas Project.

By April, Real Energy had cumulative gas flows of 70 million cubic feet and 12,000 barrels of fluids — and recorded variable flow rates up to 1 million cubic feet per day

“The estimated mean petroleum initially in place in ATP927P is 13,761 billion cubic feet, which is a lot of gas,” Mr Bertincourt said.

Two more wells are planned to gather more data.

Real Energy’s closest peer is Strike Energy (ASX:STX), which also has measurable gas resources and access to infrastructure. Strike shares trade at 7c, valuing it at $77 million.

Real Energy shares trade around 9.1c, valuing the company at about $21 million.

It has $9 million cash on hand after a placement of $2.34 million and no debt.

Gas buyers are on the prowl

East coast gas buyers are already showing interest in what Real Energy may be able to uncover.

The explorer signed a deal with Weston Energy in July to sell up to 3 petajoules of gas per year for five years, with a pre-payment of $6 million. In May it signed another deal with Santos for gas processing.

If the Federal Government’s proposed National Energy Guarantee (NEG) goes ahead, which that favours gas, companies like Real Energy with assets close to infrastructure on the East coast are set up to win.

Mr Bertincourt says gas is a vital source of reliable electricity with lower emissions than coal.

But with the Gladstone liquefied natural gas (LNG) plants sucking up domestic gas to fill export contracts, more volumes are needed for local use.

“To meet electricity supply needs, the NEM requires either increases in gas production to fuel GPG, or a rapid implementation of alternative nongas electricity generation sources.

“If neither occurs, the Australian Energy Market Operator (AEMO) projects that declining gas supplies could result in electricity supply shortfalls between 2019 and 2021 of approximately 80 gigawatt hours (GWh) to 363 GWh across South Australia, New South Wales, and Victoria.”

Real Energy shares closed on Wednesday at 9.1c

 

This special report is brought to you by Real Energy.

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