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 Reports and Commentary from the Investment World

Reports and commentaries are posted here on a regular basis.


Eastern Star Gas


Eastern Star Gas (ESG:ASX)  2005-12-22

We are  re-recommending Eastern Star Gas. ESG is a small cap gas producer, listed on the Australian stock market.

Our  private clients have already made over 100% on this stock before. We bought shares at AU$0.12 in September 2003 and sold out a year later at AU$0.28.

Below is a rerun of our initial report on this company. It is still valid and the shares look super cheap again.

Eastern Star Gas looks like one of the safest, low-priced hydrocarbon punts on the market. The company’s shares are currently trading around AU$0.12.

Its first income stream from a battery of gas-burning power generators located near the northern NSW cotton town of Narrabri, is due to come on line next June. The shares are destined to go higher as further known gas prospects are brought into production.
ESG listed in February 2001, with hopes of commercialising known gas leads in the Narrabri region, with initial focus on Petroleum Exploration Licence 238 (PEL238), covering an area of 9100 sq km. ESG has a 100% equity in all conventional natural gas (as found in sandstone reservoirs) within the area. It is earning also a 32.5% interest in any coal bed methane gas reserves within the area through spending $4.75m over three years to farm into a joint venture with Hillgrove Gold and Toronto-listed Gastar Exploration.
$39m has already been spent on the coal-bed methane project since 1998, from which Gastar has reported possible methane gas reserves of 8.7 trillion cubic feet. By con­trast, the potential unrisked natural gas resource within PEL238 has been assessed at 1.4 trillion cubic feet.

So far, ESG has brought into production just one small gas-field, the Coonarah, whose reserves represent 1% of the total unrisked natural gas potential of PEL238. Yet this one relatively small project is forecast to generate $35m in free cashflow over the 10-year life of a contract with Country Energy to supply electricity converted from gas. Gas is piped 12km from the Coonarah field to the company’s generators, sited 10km west of Narrabri. The completed project cost $15m, of which $1.5m came from company resources, $3.5m from a Rothschild loan repayable over three years out of power station revenue, and $10m under a lease purchase from GE for 12 x 1MW gas-engine generator sets. The sets may be purchased after three years for a pepper­corn with many years of life left in them.

Country Energy has already agreed to buy further production, and drilling has begun on the first of three wells targeted at natural gas with hopes of doubling the output of the power plant. In addition, ESG, as operator of the coal seam joint venture - has successfully completed Bohena 4L, its first horizontal well on a coal gas discovery 20km south of the Coonarah field. The Bohena field is larger than the Coonarah and a third field to be readied for production, the Lynwood, is about the same size as Coonarah.

In June, petroleum analysts, conservatively assessed those three projects to have a cumulative unrisked net present value of 24 cents a share. That  represents only 3% of the total unrisked conventional gas potential of PEL238, ignoring any potential for the coal seam methane gas. Since then, the company has raised a net $8.2m through placing 70 million shares at 12cents to brokers Macquarie  Equities and Bell Potter. That takes issued capital to 260 million shares, diluting the above valuation somewhat. With $8m cash now and an eight well program to cost $4m on coal seam gas development and $3m on conventional natural gas in 2004-05, the company should not need to ask for more before next year. Planned wells are all relatively shallow and should cost no more than $800,000 to complete.

In the interim, with hopes of proving sufficient reserves either on its own or with other north-eastern gas prospectors, ESG looks to the future of building a pipe line for the more lucrative sale of gas south  through Tamworth, the Hunter Valley and Newcastle.

A report from the NSW Department of Mineral Resources released in February identified the north
east corner of the state, over laying the Gunnedah, Surat Bowen and northern Sydney basins, as having the potential to supply current levels NSW gas demand for more than 50 years.

Buy Eastern Star Gas (ESG:ASX) up to AU$0.15. This stock could double in the next 2 years.


Disclaimer: All the information above is provided as a service for individuals and institutions. It should in no way be construed as a recommendation as an investment. Investment decisions should be based on the risk tolerance and planning horizon of the investor. Market participants must understand that past performance is also not a guarantee or predictor of future results.