$5M RLE Given Green Light to Unlock Value Across Prime East Coast Gas Acreage
The current market turmoil has marked down the value of a number of small caps, such that investors with an eye for the long term are able to pick up shares in companies at heavily discounted prices.
One such company is Real Energy (ASX:RLE). The company is currently capped at $5M, and had $2.1M in cash at 13 December 2019.
RLE is a coal seam gas (CSG) development company that has an ability to plug straight into existing supply channels at a time when demand for gas will peak, as locked-in contracts to ship gas to Asia exacerbate Australia’s shortage issue.
Right now, in softer market conditions, is the time to be developing projects with a view to starting production when the market springs back to life.
RLE recently entered a 50/50 JV with Strata X (ASX: SXA) on the Venus Project, which is located in a prolific CSG producing region – the Surat Basin – where over 4,000 wells have been drilled, and over 1200 PJ of 2P reserves sit in nearby CSG fields.
The neighbourhood is host to The Ironbark Project which was sold for $231 million that has reserves of 129 petajoules (PJ).
The Venus Project sits in prime CSG acreage, and RLE is aiming to unlock considerable value over the coming 18 months in the lead up to first gas production, which will include the proving up of reserves and drilling along the way.
It is worth considering other projects in the area when trying to ascertain a fair value for RLE, and how the market might react to project milestones getting hit.
The $233M capped Senex Energy (ASX:SXY) is developing Project Atlas in the Surat Basin, with reported 2P reserves of 144 petajoules.
Shares in Senex increased 50% from 28 cents in June to hit a high of 42 cents in September after it announced its drilling program had commenced at Atlas. The company moved to first production on 8 October 2019.
Finally, Central Petroleum (ASX:CTP), currently capped at $53M, is developing Project Range which has a reported 2C contingent resources of 270 petajoules. Central Petroleum’s share price increased 60% over the same period as Senex and as we have previously reported demonstrates how quickly success can be realised in the CSG industry.
Real Energy is valued by the market at just $5M, a fraction of the value of its neighbours, which means the company is much more leveraged to success on its project.
RLE shares have been up as much as 30% over the last week, backed by the news that the Queensland Government has officially granted title of the Venus Project permit ATP-2051 (previously PLR2019-1-11) to the JV.
Project Venus is located within the main Walloon coal seam gas (CSG) fairway in the Surat Basin, Queensland and is immediately adjacent to gas infrastructure and prospective for CSG over its entire area of ATP 2051.
The Strata X JV brings Ron Prefontaine to the RLE table.
Prefontaine was the technical director of Arrow Energy and founding managing director of Bow Energy, two ASX-listed CSG companies that were separately taken over in 2010 and 2011, respectively, for a combined total of approximately $4 billion.
He will act as executive chairman of the group, with RLE believing he can have a major impact on the JV’s exploration activity.
On the back of the Queensland government’s grant, Real Energy released its planned 2020 works program to market. This points to plenty of news to come, so let’s have a look at exactly what the work program entails and why Real Energy makes for a solid investment option.
Catching up with ...
Share Price: $0.015 (as at 7 April 2020)
Market Capitalisation: $5.3 million
Cash at end of last quarter: $2.1M
Here’s why I like RLE:
All systems go at Venus
The market responded well to the recent news that Real Energy Corporation (ASX:RLE) was officially granted title of the Venus Project permit ATP-2051 (previously PLR2019-1-11) to the Strata-X Energy and Real Energy Corporation joint venture (RLE: 50% / SXA: 50%).
The decision by the Queensland government effectively gives the JV the green light to start its 2020 work program.
Project Venus is immediately adjacent to gas infrastructure and is prospective for CSG over its entire area of ATP 2051.
Independent consultant, MHA Petroleum estimated that the low and high prospective gas resource was 555 petajoules and 833 petajoules respectively.
The volumes were obtained by calculating the potentially recoverable portion of the gas-in-place using the overall prospect area of 154 square kilometres, the mapped net coal thickness, raw gas content and coal density, as well as a range of estimates of the gas recovery factor of the coals.
It should also be noted that there is no certainty that any portion of the resource will be discovered and/or whether it will be commercially viable to produce any portion of the resource.
Real Energy will be the administrative and commercial operator while Strata-X, at least for the initial phase to predictable reserves certification, will be the technical operator.
The pairing of Real Energy and Strata-X is a smart one as RLE looks to attain producer status. The JV could help RLE achieve its aim sooner rather than later.
As we reported in our previous article RLE Aims to Provide East Coast with Gas Shortage Solution, Real Energy views Project Venus as potentially a commercially viable producer, being surrounded by major CSG-producing assets.
High probability of success
The Venus Project is adjacent to gas infrastructure, and the JV plans to expedite appraisal and conversion of Resources to Reserves to fast track development.
There are several previously drilled CSG and conventional wells located within and around ATP-2051, including a fully cored well indicating the upper Walloon coal seams are fully gas saturated.
One of the historic wells in the permit, the Connor-1 well, was drilled immediately adjacent to the core hole, then cased and underreamed (enlarged beyond the regional drilled size), but it was never properly flow-tested.
These are the highlights in a nutshell:
- 34 metres of net Walloon coals
- ~100% gas saturations in upper Walloon coals (upper 25 metres)
- Permeability in upper Walloon coals in Connor-1 and surrounding wells
- Connor-1 was never properly flow tested
The Project Venus JV plans to re-enter the Connor-1 well to reservoir-enhance and flow-test the upper Walloon coals.
The re-entry flow-test program is designed to prove sufficient water flows to allow efficient dewatering and early gas flows from the fully gas saturated upper Walloon coal seams.
The Connor-1 re-entry start date will be announced once the contractors and timing are confirmed, with a trip to the field site to be undertaken next week.
Assuming the Connor-1 re-entry flow-test goes to plan, the Project Venus JV expects to drill two wells offsetting Connor-1 and fully equip the three wells as a production pilot program.
The pilot program will include long term flow-testing of the upper Walloon coals with the objective to prove commercial gas flows rates.
Once commercial gas flow rates are achieved in the pilot program, the Project Venus JV can commence progressively converting the 658 BCF (694 PJ) Prospective Gas Resource to reserves with the goal to fast track development of the project, thereby offering the potential for early cash flows.
We expect this to happen in third or fourth quarter of 2020.
East Coast gas issues still provide opportunities for RLE
The world is currently consumed with COVID-19 shutting everything down and the oil price affecting energy stocks in general, but issues and opportunities will still exist: for RLE, it will continue to develop its project whilst prices are suppressed and start producing when gas prices are potentially higher again.
Certainly, the talk around East Coast gas supply hasn’t waned.
As you can see by the graph below, East Coast gas demand will continue to rise through the coming decade as production reduces.
The Australian Energy Market Operator (AEMO) predicts a shortage of gas in the southern states during winter in 2024, unless more southern supply sources are developed, or pipeline capacity limitations are addressed.
AEMO Managing Director and CEO, Audrey Zibelman, said, “Supply from existing and committed southern gas developments is expected to reduce by more than 35 per cent over the next five years, despite the increase in newly committed gas projects over the last 12 months.”
Forecasters believe several existing gas fields could end production between mid-2023 to mid-2024. However, if production stops earlier, southern states may experience peak winter day supply gaps as early as 2023. There is also the decline in southern production coinciding with the staged closure of Liddell Power Station to factor in.
“The risk of peak day shortfalls could be resolved by a wide range of different options,” Ms Zibelman said.
“This could include the development of new LNG import terminals, pipeline expansions, or new supply that could result from the Victorian Government’s decision to lift the ban on onshore gas exploration from July 2021.”
Real Energy could be well placed to provide supply.
Now it has Queensland approval to move ahead at the Venus Project, it will look to fast track into production and potentially repeat the feats of Senex and Central Petroleum.
With plenty of news to come as Real Energy ramps up work at Connor-1, this could happen sooner rather than later.