The coal seam gas industry in Australia is quickly being consolidated as the majors take over the first players in the industry. Shell is the latest, acquiring Arrow Energy. Among the minnows which will eventually be acquired are:
1. Comet Ridge Ltd (ASX:COI) - Comet has rallied recently and has been sold back to a support level of 30c, so its good buying now.
2. Blue Energy Ltd (ASX:BUL): This stock has also rallied, but I would wait for it to pull back to the 20c support before buying this one.
The appeal of natural gas ought to be apparent - its the lifeblood of any country. I however question the commitment of governments to the greenhouse scandal given that I published a book citing the crappy arguments of the people behind this scaremongering. The science really is abysmal for any critically-minded geologists like myself. The appeal of coal seam gas is simply:
1. The certainty of resources - you can have a lot more confidence the gas is there if the coal is there because there is no significant reason for gas content to change across a basin given the breadth of the organic deposition and the mildness of the subsequent deformation. Qld coal is very good coal, and its pretty gassy as well.
2. Infrastructure - There is already a lot of infrastructure in place, but it is going to increase of course. The principal investment will be the LNG facilities on the coast, so the gas can be exported, however also expect some local processing, and even perhaps some industry based on these energy supplies. The appeal of coal seam gas is that it favours energy market competition. Even if the big companies acquire large stakes, there is always some acreage to be developed, and it suits small-scale regional development. This is why I think most of these companies will be acquired.
3. Looming energy crisis - There is a rapidly expanding international need for gas, and few secure countries from which to purchase it. Africa has a lot, but Australia is a far more secure source of supply. Asia has very little gas, and Australia is closest. This augers well for Australia in the long term, as well as these developers, though the LNG infrastructure is unlikely to be available before the crisis I suspect.
4. Takeover targets - These small companies might make particular sense to the Chinese, particularly since it might be hard for them to get 'hard equity' in any northern Australian gas assets. No chance of buying Woodside.
5. Well understood market - The value of coal seam gas is well understood which makes it easier to finance a project. My only concern is the prospect that methane could possibly escape from the seams. The reason why this might occur is because geological strata are not always capped, so I could envisage a reduction in hydrostatic pressure resulting in gas being emitted into the atmosphere. I have no idea if anyone is looking at this; but it is a potential risk for the industry.
6. Market dynamics - I think the smaller companies in the long term will target the domestic market because of lack of access to LNG export capacity. The majors will be looking at export for higher prices. The power generators will be spreading contracts around to maximise the competitive dynamics, so these companies will be acquired when they reach critical levels, but likely before they have a chance to lock their gas sales into low-priced, long term contracts which would reduce the upside for the majors.
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Andrew Sheldon www.sheldonthinks.com
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