Company Overview: Cooper Energy Limited is an upstream oil and gas exploration and production company whose primary purpose is to secure, find, develop, produce and sell hydrocarbons. The Company's operations consist of oil production in the Cooper Basin (onshore Australia) and the South Sumatra Basin (onshore Indonesia); pre-development activities associated with the Sole and Manta gas fields in the offshore Gippsland Basin, and exploration for oil and gas in the Cooper, Otway and Gippsland basins. The Company's Australian Business Unit includes exploration and evaluation for oil and gas, development, production and sale of crude oil in various areas in the Cooper Basin, Gippsland Basin and Otway Basin. It holds interests in approximately three exploration licenses, over 30 retention licenses and approximately 10 production licenses in the South Australian Cooper Basin. The Company holds interests in over four exploration licenses and a retention license in the onshore Otway Basin.


COE Details

Cooper Energy Ltd. (ASX: COE), an oil and gas exploration company focusing its activities in the Cooper Basin of South Australia, has an exploration portfolio that comprises of six tenements located throughout the Basin. The group is making immense developments in terms of exploration and gas production across key projects and is expected to witness an upside from factors such as fast-tracking of exploration drilling in year 2019 and approvals of utilisation of Manta PRRT credits on Sole.

Decent September Quarter 2018: COE for September quarter, has posted 51% rise in sales revenue to $21.8 million due to higher prices for oil and gas and higher gas production. The quarterly revenue grew 7% from the prior quarter.  The production increased 6% to 0.37 MMboe from previous quarter’s 0.35 MMboe. There was a 13% rise in gas production to 1.88 PJ for quarter against the previous quarter, and this was at the back of increased output from Casino Henry after the workover of the Casino-5 well in April 2018. However, overall production declined by 14% on year on year basis. Gas production for the September quarter was lower by 11% against the previous corresponding period, as Casino Henry as well as Minerva yielded lower than expected output. There was a decrease in company’s cash at the end of September from $236.9 million at the beginning of the quarter to $203.8 million at the end. The cash held in escrow was lower to $5.8 million from $20.2 million at the beginning of the quarter, and this was due to payments made against offshore drilling program.

During the first quarter of FY 19, borrowings increased from $125.9 million to $153.2 million as debt was drawn down to fund capital expenditure on the Sole Gas Project. With regards to capital expenditure during the first quarter of FY 19, cash payments totaled $74.0 million against $65.9 million in the June quarter. Capital expenditure incurred during the quarter was $66.2 million while the company has completed Sole’s production wells and the company is now laying the pipeline to connect Sole to the Orbost Gas Plant. COE has been few months away from project completion and is expected to witness a transformative uplift in production and cash flows. If one looks at the Minerva gas field, the same contributed 0.25 PJ of gas during the first quarter of FY 19 compared to 0.28 PJ in the previous quarter, as natural field decline led to lower output. Minerva contributed 0.74 kbbl of condensate to September quarter production compared with 0.72 kbbl in the previous quarter. Additionally, front end engineering and subsurface studies are progressing as per the planning for the drilling of a development well in the Henry field, which is subject to joint venture approval. The group scheduled a pre-FID assurance review for October 2018; and planned that the development well will be drilled within an offshore drilling campaign slated for commencement, which is subject to rig availability, in the December quarter 2019.


Financial Performance (Source: Company Reports and Thomson Reuters)

Sole Project Scheduled to commence first gas production in July 2019: Sole Project is on track as it was complete 74% at the end of the September 2018. The first gas production is expected to commence in July 2019. The company has incurred to date Capex of $250 million. Offshore project continues to be on track within P50 budget of $355 million. The company is continuing plant upgrade works with the majority of process equipment now installed. Moreover, Pipelay has been commenced October and expected to be complete within a month. The company has completed Workstream with Sole-3 & Sole-4 awaiting connection. The company has completed successfully Sole-4 flowback. Further, lab analysis of gas has confirmed H2S 1,000 ppm, which is well within plant design and in line with Sole-2.


Sole Gas Project (Source: Company Reports)

Casino Henry Joint Venture Secured new gas sales contract for 2019: Casino Henry Joint Venture, comprised of Cooper Energy (50%) and Operator, Mitsui E&P Australia Limited (25%) and Peedamullah Petroleum Pty Ltd (25%), has signed a new gas sales agreement with Origin Energy Retail Limited. As per the new agreement, the joint venture will supply gas to Origin Energy from 1 January 2019 to 1 January 2020 at current prevailing market prices. The joint venture has also signed a new agreement with Lochard Energy for processing at the Iona Gas Plant for a minimum of 1 year and a maximum of 3 years to support a smooth transition to the Minerva Gas Plant in due course. The production from Casino Henry is currently being supplied to Origin Energy under a gas sales agreement that will expire on 31 December 2018. Moreover, the Casino Henry joint venture is also planning to complete the acquisition of the Minerva Gas Plant in due course, once the Minerva field has ceased production. The company expects that the plant will play a key enabling role in Otway Basin gas, not only for Casino Henry but also for other discoveries made in the region. Moreover, the Casino Henry joint venture has already signed an agreement with BHP Billiton Petroleum (Victoria) Pty Ltd for the acquisition of the Minerva Gas Plant on cessation of its current operations processing gas from the Minerva gas field. The Casino Henry joint venture also holds the adjoining VIC/P44 exploration permit and VIC/RL11 and VIC/RL12 retention licences. Overall, for FY 19, Casino Henry gas is fully contracted.

Signed a new gas supply agreement with O-I Australia for the supply of gas for 2019: COE has signed a new gas supply agreement with O-I Australia for the supply of gas for 2019 from its Casino Henry gas production in the Otway Basin offshore Victoria. As per the terms of the agreement, Cooper Energy will make available to O-I Australia 3 terajoules of gas per day from its share of production from Casino Henry. The gas supply from Casino Henry is fully contracted for the 2019 calendar year after signing the contracts - the O-I contract and the contract with Origin Energy as announced on 20 September 2018. O-I Australia is Australia’s largest manufacturer of glass packaging products. The Casino Henry 2019 gas supply agreement is the second between O-I and Cooper Energy, with O-I’s commitment in 2015 to take 1 PJ per annum from the Sole gas field being the first supply contract secured for the Sole Gas Project. Cooper Energy will supply O-I with 1 PJ per annum from the Sole gas field, from January 2020 for the life of the project. The 2019 Casino Henry gas supply agreements with Origin Energy and O-I are consistent with the company’s gas marketing strategy.

2019 Expected Prices in the East Coast Gas Market: FY19 supply balance is tight but has improved due to Sole start up, Gippsland Basin JV and lower gas powered generation. ACCC & Vic gas futures expect the producer prices to be in the range of $8.75 -$11.03/GJ in 2019. However, ACCC has observed some commercial and industrial reluctance to commit to term contracts. COE has observed that the marketing by LNG proponents appear to have encouraged willingness to consider longer term contracts.


2019 expected prices (Source: Company Reports)

Plans for FY19 –FY20: The gas production is planned to increase from 6 PJ to about 30 PJ pa in FY20. Sole start-up is planned to deliver the targeted multi-gas hubs for optimising supply to south-east Australia. Henry development is planned to increase production from FY20 and Sole project scheduled to complete in FY19. Minerva Gas Plant’s acquisition and connection is expected to deliver improved prices, processing costs, production and recovery rates. This is expected from FY20. Moreover, 119 PJ of uncontracted 2P reserves are still available to market, though CY19 gas contracting is completed at current market prices after competitive tender. For exploration, the target opportunities that are close to market and infrastructure, comprised of Offshore Otway (low risk, high success rates), Manta Deep (high upside), Onshore Otway (prospective for gas) and Gippsland (adjacent to existing assets). Additionally, at Manta, the company plans for drilling by FY20 and FID is expected within 12 months.


Gas marketing  (Source: Company Reports)

Stock Recommendation: Meanwhile, COE has fallen 4.17% in three months as on November 06, 2018. COE is trading at $0.465, and has support at $0.42 and resistance at $0.50. The Casino Henry Joint Venture has completed the contracting of its gas production for the 2019 calendar year after the competitive tender. The agreement with O-I is the seventh term contract signed since the company began building the portfolio of gas supply assets and gas sales agreements. Moreover, the production from the Sole gas field is planned to start in July 2019. At the end of September, the Sole Gas Project was 74% complete. COE expects to sign further new contracts with multiple numbers of gas buyers and contract periods in the second half of the FY 19 as the company contracts more gas from Sole. Given the catalysts that are setting next leg for growth and value, and on an F24M EPS estimate with low double digit PE, a double digit rise (%) in stock price is expected. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $ 0.465, up 1.1% on November 07, 2018.
 

COE Daily Chart (Source: Thomson Reuters)

 
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