Australia | Aug 06 2009
By Chris Shaw
The competition to develop liquified natural gas (LNG) projects in Australia has seen a number of players emerge with potential new projects, one being Arrow Energy ((AOE)) with its Fisherman’s Landing project in Gladstone in Queensland. The company is being helped by its alliance with global energy major Shell, who has taken a 30% interest in Arrow’s Australian upstream tenements and a 10% stake in its international assets.
In recognition of the fact the company is now a $3.0 billion integrated coal seam gas company, stockbroker Deutsche Bank has initiated coverage, putting a Hold rating on the stock with a price target of $3.60. According to the broker, while the company offers growth this comes at a higher risk to its peers, so a more cautious view is justified.
An example of the risk is the Fisherman’s Landing project, as it would be a world first in terms of developing a coal seam gas (CSG) to LNG project. The $500 million project has 2013 as the target production date for the first 1.5 million tonnes per annum train (a train allows gas to be liquified by cooling, making it easier to be condensed and transported), with Arrow having exclusive rights to supply CSG to the first train.
On the broker’s numbers, if the Fisherman’s Landing LNG Train 1 was developed its net asset value for the stock would increase by 23% to $4.43 per share, which shows how much potential upside there is if the company can de-risk its projects.
Further upside would come from either additional LNG Trains at Fisherman’s Landing or via development of the company’s CSG projects in India, China, Vietman and Indonesia. As well, the broker points out Shell has announced plans to develop its own LNG facility on Curtis Island at Gladstone, which presents another monetisation opportunity for Arrow given the relationship between the two companies.
Other existing projects for Arrow include CSG producing assets at Tipton West, Daandine, Kogan North and Moranbah, while it also holds interests in three power stations in Australia. As well, Arrow holds a 50% stake in the Central Queensland Gas Pipeline, with which it is looking to link its CSG assets at Moranbah to Gladstone, supplying gas to both the national grid and the Fisherman’s Landing project. A study into the feasibility of a pipeline from Surat to Gladstone is also being undertaken, along with additional exploration work as the company looks to lift its gas reserves.
Factoring in the group’s projects, the broker estimates the company has an EV/BOE (enterprise value to barrels of oil equivalent) of $7.10, which is below its peer median of $12.70. This is appropriate in its view given the early stage nature of a number of the group’s projects.
Similarly, Deutsche Bank estimates the stock is trading on an EV/3P reserves multiple of $0.51/GJ at its net asset value of $3.60 and as this is below the average for comparable CSG transactions of $0.75/GJ it shows the potential valuation upside on offer. Any re-rating is unlikely in the short-term in the broker’s view as it suggests there has been a shift away from valuing on reserve size and quality to one based on monetisation strategy and here it believes the company still has work to do to prove up the upside potential.
JP Morgan also suggests the transactions made by the company over the past several months mean the FY09 result, for which it expects normalised earnings of around $12 million, won’t be representative of the long-term value in the business.
Despite this the broker retains its Underweight rating, based largely on concerns the upstream capex estimates for Fisherman’s Landing are low relative to other proposed projects in the area. A signing of a gas sales agreement is expected in coming months and the broker notes this would give it greater confidence in terms of factoring in value for the project.
JP Morgan has set a price target of $3.29 for the stock, noting this includes a 50% valuation weighting for a two train development at Fisherman’s Landing and 50% of its incremental valuation for a three million tonnes per annum supply agreement with Shell for Curtis Island.
Citi is more bullish however, rating the stock a Buy and noting the group’s latest reserve update has lifted proven and probable reserves by better than 50%, which the broker sees as meaning the company does have the gas to provide 20 years of LNG supply.
Credit Suisse was also impressed by the magnitude of the recent increase in reserves but notes it had already factored much of this in, so while it increases confidence in the outlook for the Fisherman’s Landing project it doesn’t cause any increase to its numbers. As a result its Neutral rating is maintained.
Overall the FNArea database shows the stock is rated as Buy twice, Hold twice and Sell twice, with an average price target of $4.37. Consensus earnings per share forecasts for the company are for 9.4c this year and 4.3c in FY10, while Deutsche Bank’s FY11 forecast of EPS of 8c highlights the fact it will be several years before the group’s projects deliver substantial earnings.
Shares in Arrow Energy today are slightly weaker despite a stronger overall market and as at 11.25am the stock was down 5c at $4.09. This compares to a trading range over the past year of $1.74 to $4.43.