Orbost Gas Plant Key To Cooper Energy

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The outlook for Cooper Energy hinges on the performance of the Orbost gas plant and whether it can achieve nameplate capacity.

-Cost to obtain nameplate capacity remains unclear
-May take several months before reconfiguration produces results
-Could Cooper Energy become a takeover target?
 

By Eva Brocklehurst

Cooper Energy's ((COE)) Sole gas play in Victoria's Otway Basin is demanding attention, and the outlook is heavily dependent upon the performance of the Orbost gas plant. The main focus is taking production from the current 40-45 TJ/d to nameplate at 68 TJ/d, to enable the delivery of gas into higher-priced term contracts.

However the Orbost plant is being shut for cleaning and will run at limited capacity for some time. It will shut again in November for three weeks to reconfigure the absorbers while analysis of the cause of the problems is ongoing.

Management has indicated there is no change to gas prices under the agreements with industrial utility customers, although Macquarie still envisages some risk while noting the cost of the works have not been finalised. Orbost gas plant repairs have weighed on the stock and until the plant reaches nameplate capacity Ord Minnett suspects Cooper Energy will trade at a discount to full value.

Work is progressing in order to improve production at the plant and Cooper Energy has highlighted a transition agreement with APA Group ((APA)), where revenue and costs will be shared on a 50-50 basis until firm and stable production can be achieved. Once this occurs the transition to contract term pricing as opposed to spot sales will occur.

Victorian spot prices have averaged $5.00/GJ in 2020 to date, down from $9.30/GJ in 2019, because of lower demand and a weaker global LNG market. This has meant Queensland gas volumes are increasingly diverted to the domestic market. As the natural decline affecting south-east Australian supply continues, bottlenecks are constraining southern gas flows while budget reductions have slowed the development of new supply.

Nevertheless, Bell Potter, not one of the seven stockbrokers monitored daily on the FNArena database, retains a positive view on the situation and upgrades to Buy with a $0.48 target. The broker believes the company is becoming a producer of scale and these are long-life assets which have good infrastructure in place.

Risk

The main risk, Credit Suisse asserts, is if Orbost does not reach nameplate. Moreover, the cost to obtain this level of production is uncertain as the actual cause of the problems is not altogether clear, and the broker understands many investors may wish to steer clear of the stock.

Canaccord Genuity, also not one of the seven, believes market tightness will re-emerge in 2022, and maintains a long-term gas forecast of $8.00/GJ. The broker holds to the view that it remains a case of when, not if, the plant hits its 68 TJ/d nameplate, although understands others may be less confident.

Canaccord, with a Buy rating with a $0.56 target, agrees the growth potential in the Otway basin shouldn't be undervalued, noting the acquisition and upgrade of the 150 TJ/D Athena gas plant, in which Cooper Energy has a 50% stake, has several benefits. This will lower operating costs, increase reserves and enable the accelerated development of additional gas.

Cooper Energy has only just started to test the upside potential of the basin, in the broker's view, and the Annie discovery is the beginning, while there is drilling at Elanora and Nestor to look forward to.

The company is in the process of arranging extensions to its repayment profile and Macquarie assumes this will also come at a cost, although acknowledges the decision is prudent because of the uncertainty that remains surrounding this Sole gas ramp-up.

Following the pull-back in the stock, Macquarie assesses the risk/reward balance is becoming more promising. It will be more than three months before the market will witness the outcome of the reconfiguration of the absorbers and the broker intends to revisit the investment case closer to this time.

Takeover Target?

Credit Suisse points out there is increasing likelihood Cooper Energy could become a takeover target, if other industry participants are confident in the project's growth path and synergy potential. More information on costs and commercial synergies at the Orbost plant may also be available to operators such as SGH Energy ((SVW)) and Beach Energy ((BPT)) that have assets nearby.

The broker considers, at this stage, the market is appropriately factoring in the risks and prefers to remain on the sidelines until the issues are resolved and LNG prices recover.

Cooper Energy reported an underlying net loss of -$6.6m in FY20, larger than many expected. The result was primarily affected by costs and the company took $108m in impairments, mainly across the Otway and Gippsland assets.

Full year capital expenditure guidance was reiterated at $50-58m for FY21. The majority is associated with the Otway development and a final investment decision is targeted Otway and Manta-3 (Gippsland) in 2022. FNArena's database has two Buy ratings and two Hold for Cooper Energy, with a consensus target of $0.44, suggesting 38.3% upside to the last share price.

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