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 that focuses its activities in the Cooper Basin of South Australia, has a complex yet strong exploration portfolio including six tenements located throughout the Basin. The group lately reported about confirmation on its Sole pipeline’s structural integrity mitigating few challenges laid down by project delays etc. The group has a decent defensive portfolio of assets with focus on Australia’s East Coast Gas market. Further, exploration drilling of Elanora and Annie depict success for future. The group is also managing a decent financial performance with operating and EBITDA margins rising by double digit (on year basis) and well above industry medians.


Financial Performance (Source: Company Reports and Thomson Reuters)

Pressure Test on Sole Pipeline Successful: COE during the testing of performance of pipeline acceptance pressure (hydrotest) found anomaly due to thickness of the wall. Therefore, a section of the pipeline was removed by the pipeline installation contractor, owing to a damage from the sea floor and after this a hydrotest of the 65 km pipeline was completed successfully. This was done from Orbost Gas Plant to the Sole wells; and COE conducted the hydrotest with the confirmation on capability of the pipeline to retain the required pressure. The group has thus taken a key step in preparing the pipeline for permanent repair and COE now plans to repair the damaged section of pipeline by April 2019 after getting the necessary regulatory approvals. Meanwhile, the Sole Gas Project is within the budget and is also on schedule. The first commercial gas production is planned to start in July 2019.

Completed the assessment of the Annie and Elanora prospects technically: Cooper Energy Limited (COE) had conducted the Prospective Resources assessment with the use of the probabilistic resource estimation. This is meant for the company’s Waarre Formation in the Annie and Elanora prospects. The methodology was devised in view of the uncertainty relating to key reservoir input parameters for the prediction of the likely range of outcomes; and COE was basing the process as per definitions and guidelines set in the Society of Petroleum Engineers (SPE) 2007 Petroleum Resources Management System (PRMS). The technical assessment of Annie and Elanora prospects in VIC/P44 and VIC/L24 (COE hold 50% interest in each) has been completed now. These two locations are situated in the offshore Otway Basin. Given the assessment of the Best Estimate Prospective Resources at aforesaid locations, the results for 71 Bcf and 100 Bcf, respectively were attained. The estimations were also related to the risk of discovery as well as risk of development. About 56% of probability of finding gas along with proving a minimum developable resource size at Annie has been projected; while it is 44% at Elanora. The Annie and Elanora prospects can be drilled in 2019 only if the joint venture gets the approval to do so and this is also dependent upon the rig availability. The potential discoveries at the locations can de-risk the existing prospect inventory along with opening some new areas for exploration drilling.


Prospective Resource Estimates (Source: Company Reports)

Sole Project to commence its first gas production in July 2019: Sole Project is on track and the company had completed 81% of the project at the end of the October, 2018. The first gas production is scheduled to commence in July 2019. The company has already spent $250 million of capital for building this project; and the company is on track within P50 budget of approximately $355 million. The company is upgrading works at the APA Orbost plant and it has already installed the majority of process equipment. The company will start commissioning from April, 2019.

Growth profile from the gas projects and resources: The commencement of production from Sole is projected to add 24 petajoules per annum to 2018’s level of 6 petajoules per annum. Going forward, the company is expecting that there is the prospect of another increment of up to 25 petajoules if Manta goes to the stage of Final Investment Decision and is developed accordingly. The discoveries from exploration will provide upside from the current scenario and the company is reviewing the opportunities to add further value. Overall, the gas production is projected to increase by five folds from the existing 2P reserves & current projects.


Production Outlook (Source: Company Reports)

COE’s inventory of uncontracted gas: The company’s inventory of uncontracted gas has the potential to get additional contracts, provide exposure with regard to the new trends in market pricing and terms. Currently, the company’s approximately 38% of the proved and probable reserves have the potential of additional contracts. The company has already completed the successful tender for Casino Henry 2019 gas supply, and will be bringing additional gas supply from Sole and Casino Henry projects to the market.

Gas supply and pricing: COE has agreed to follow the action by the ACCC for the publication of the prices for agreed gas contracts. The company has informed that the prices published are much less than the extreme levels that are speculated. As per the ACCC finding, the producer prices contracted for the supply to south-east Australia in 2019 are about $1/GJ less than that of retailers and within the range of $9 to $11 a gigajoule. Moreover, as per the ACCC’s observation, the most effective way for reducing the gas prices in south-east Australia is through the increase of the production of gas in the region. Low gas price discourages the investment meant to bring new gas to market. The company has already put its efforts to find and to bring more gas from south-east Australia to market, this includes the $605 million Sole gas field and through other projects being pursued. During the past three years, the company has signed  seven term contracts for the supply of the gas to both utility and industrial buyers and the company expects to sign more contracts with the potential buyers in the second half of this financial year.

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 had earlier expected 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 sign to term contracts. COE has already observed that  marketing by LNG proponents are encouraged willingness for the consideration of longer term contracts.


2019 expected prices (Source: Company Reports)

Plans for FY19-FY20: The company has planned to increase the gas production 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 the 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 to start from second half of the CY19. Moreover, 119 PJ of uncontracted 2P reserves are still available to market, though CY19 gas contracting 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 to have drilling by FY20 and FID is expected within 12 months.


Outlook Schedule (Source: Company Reports)

Stock Recommendation: As per the December 2018 Quarterly Rebalance of the S&P/ASX Indices, COE stock has been added to S&P/ASX All Australian 200 Index, effective from December 24, 2018. Meanwhile, COE has risen 4.7% in one month as on January 15, 2019. COE is trading at $0.45, and has support at $0.4 and resistance at $0.5. The financial performance of the company for the year to date is well ahead of the previous corresponding period. The company’s revenue and cash flow had benefitted from the new gas contracts and also due to the higher oil prices. For the September quarter 2018, the company’s sales revenue was 51% stronger than posted for the September quarter 2017; and this trend is expected to continue going forward. Further, the company’s gas production is expected to rise multifold times and there will be transformation in the cashflows within a year. The company is contracting for gas and Otway Basin exploration is expected to start in early 2019. Sole project is 81% complete and is on budget & schedule. Based on the foregoing on-track developments that are expected to boost earnings and lay down a single digit growth in stock price in the next 1-2 years, we give a “Buy” recommendation on the stock at the current price of $ 0.45.


COE Daily Chart (Source: Thomson Reuters)
 

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