Australia | Oct 20 2006
By Chris Shaw
The proposed PNG gas pipeline project now seems less and less likely to go ahead, but while this is a negative for the likes of Oil Search (OSH) it presents opportunities for alternative gas suppliers in the Queensland market, one that Arrow Energy (AOE) is moving quickly to take advantage of.
The company is a coal seam gas producer with interests centred in the Queensland market, though as Intersuisse notes the company is also attempting to expand its overseas reach.
Such a move has the potential to not only increase the company’s reserves of gas, but it will also allow management to ramp up its strategy of attempting to increase its margins by selling gas in a variety of forms and into a number of different markets. The benefits of this are overseas markets tend to attach a higher price to gas, with average sales in India of around $7-10/GJ compared to prices of $3.00-$3.50/GJ in Australia.
Intersuisse rates the stock as Buy, noting it has made several deals in recent months as it looks to expand its operations. These include a gas-to-liquids scoping study with Alcan and a study with Transfield Services (TSE) about the potential for a gas fired power station at Moranbah. Additionally, it notes the company is well placed to add to its gas contracts as the Moranbah to Gladstone gas pipeline is developed by the Queensland government.
The overseas emphasis has also gained a boost as the company recently won a participating stake in three exploration blocks in India, where an exploration program is to commence next year. This is in addition to further drilling in and around Moranbah, where the company hopes to prove up to another 700PJ of reserves to add to its current 440PJ of reserves, which was upgraded last month.
Intersuisse expects the company will record a profit this year of around $10.5m, rising to $29.1m in 2007. This equates to earnings per share of 5.2c, the broker increasingly confident the company can generate earnings per share of as much as 20c by 2011.
Its confidence is based on the potential for the company to become a significant producer thanks to its gas-to-liquids technology, which the broker suggests is starting to gain more and more attention in the marketplace. It involves the use of a catalyst to convert gas to synthetic crude, which can then be processed into high end distillates such as diesel. The attraction in the broker’s view is Australia’s east coast remains largely short of supplies of diesel fuel, meaning there is a ready market.
Recent share price gains suggest the stock is generating increased investor interest, as from a price of less than 70c a few weeks ago the shares are trading close to $1.00 now. The range over the past 12 months is 52.5c – $101.5, with the stock today trading at 98.5c. This gives the company a market capitalisation of around $450m, large enough that some professional investors may start to show interest.
The larger end of the market has yet to pick up on the story though, as the company is not covered by any of the brokers or equity researchers in the FN Arena database.