Tim Treadgold: Why this junior is well placed to ride the east coast gas shortage
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Australia’s east coast gas shortage, which has propelled prices in major cities to more than double the level on the west coast, is a compelling investment theme but finding a well-priced entry among junior stocks is not easy, until you take a look at Comet Ridge (ASX:COI).
Not a star performer this year, the company’s share price has halved from 37c in early February to latest sales at 18c.
One reason for the fall is the downward pressure on global oil and gas prices. Another is a recent capital raising which saw Comet Ridge raise up to $13m through a share placement and purchase plan at 19c.
Despite the diluting effect on the share price the fresh funds are an important part of the process in lifting the stock from the ranks of prospective gas producers to that of a supplier to a thirsty market.
First project likely to generate cash flow for Comet Ridge is a 40 per cent stake in the Mahalo joint venture, which covers a 911sqkm tenement of prime coal-seam gas territory inland from the liquefied natural gas (LNG) centre of Gladstone on the Queensland coast.
Nearby pipelines provide easy access to the domestic gas market as well as the LNG export market, which is where Comet Ridge’s position might become quite interesting because it has unique partners in the Mahalo project.
Santos, a 30 per cent shareholder in Mahalo, is also a shareholder in Gladstone LNG (GLNG) and Australia Pacific LNG, a rival Gladstone-based gas exporter, also has a 30 per cent stake in the project.
In theory, the Mahalo project has two natural LNG markets for any gas produced which is why Comet Ridge describes it as one of eastern Australia’s best placed but as yet undeveloped coal-seam gas deposits.
The initial development plan for Maholo is being finalised with Santos and APLNG which uses one of its shareholders, Origin Energy, as its upstream (gasfield) operator.
Drilling trials have encouraged Comet Ridge to develop a production concept starting at around 60 terajoules (Tj) of gas (equivalent to 3.8 million barrels of oil a year) from a simple, modular, gas processing plant which could be expanded to 80/Tj later.
The plant would require a short (65km) pipeline to connect it to two major gas lines running to Gladstone.
On the current timetable of the joint venture a final investment decision (FID) is scheduled for next June with first gas expected to be available 15 to 18 months later.
Almost as a bonus, Comet Ridge also has 100 per cent title to the Maholo North tenement, which abuts the joint venture ground and from which a modest production start of around 10Tj is seen as possible with gas fed into the passing Denison pipeline and delivered to the domestic market.
While Mahalo is Comet Ridge’s most advanced project there are two others with promise. A large tenement in the Galilee Basin is emerging as both a coal-seam and conventional gas producer.
A large number of gas targets have been identified in shallow coal seams (100 per cent Comet Ridge) and deep sandstones and marine shales where Comet Ridge has a 70 per cent stake, with Vintage Energy holding the balance.
One of the Galilee targets called Albany has already revealed a contingent gas resource with the next step being more drilling to convert the resource to a reserve with the gas-constrained markets of Townsville and Moranbah targeted for future sales.
Across the border in NSW, Comet Ridge has another joint venture with Santos on a big prospective gas tenement which adjoins the Narrabri project that is edging towards final approval and development.
Once Narrabri moves ahead, Comet Ridge will be well positioned in terms of location and as a prospective future development partner most probably with Santos.
Hints that Comet Ridge is getting close to a significant growth phase can be found in the successful capital raising and the appointment of new director, Shaun Scott.
Scott was managing director of Arrow Energy, a Queensland coal-seam gas pioneer before it was acquired for $US3 billion ($4.4 billion) in 2010 by Royal Dutch Shell and PetroChina.
Thinly researched by major investment banks and stockbrokers because of its modest $140m stock-market value, Comet Ridge has caught the eye of analysts at Bell Potter, earning a buy tip last week and a price target of 28c — 55 per cent higher than last sales.
“With a positive FID on the Mahalo joint venture and the potential for early stage production at Maholo North, Comet Ridge could be producing gas in 2021,” Bell Potter said.
“While there has been recent weakness in global energy markets, there is predicted to be an LNG supply deficit from 2022-23. This should translate into higher gas prices in LNG and Australian east coast domestic markets.
“We believe that Comet Ridge’s Mahalo joint venture partners are incentivised to bring the project into production.
“Comet Ridge also has leverage to potential gas developments in Queensland’s Galilee Basin and the Gunnedah Basin in NSW.”
Encouraging as Bell Potter’s view is of Comet Ridge, the company has hurdles to clear before it becomes a gas producer, but it does have the advantages of strong partners, well-located tenements and a thirsty gas market on its doorstep.
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