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In 2011 the International Energy Agency predicted a coming “Golden Age of Gas”.  With multiple liquefied natural gas (LNG) facilities under construction, some thought natural gas would usher in Australia’s next great resources boom.  In that same year the US Department of Energy issued a report indicating Australia has 437 trillion cubic feet of recoverable shale gas.  A recent study from the Australian Council of Learned Studies states undiscovered shale gas reserves could drive total reserves as high as 1000 trillion cubic feet. 

Shale gas is gas trapped in shale rock formations that can now be extracted using new drilling and recovery technologies pioneered in the United States.

But no-one is forecasting a boom any longer.  In short, massive cost overruns, competitive threats from the US and Canada, and environmental concerns have concerned investors.  Cost is perhaps the most significant issue as shale gas reserves (in some areas) require massive capital expenditures on the required infrastructure.

The first shale gas well in Australia, the Moomba-191 in the Cooper Basin, is part of a joint venture headed by Santos Limited (STO), with 66.6% ownership, in partnership with Beach Energy (BPT), holding a 20.21% stake, and Origin Energy (ORG), with 13.19%.  To date the well has outperformed similar wells in the United States, where shale gas recovery has been successful. 

Ample existing infrastructure and processing facilities means lower capital expenditures.  Here are five stocks operating in the Cooper listed by market cap:

Company

Code Mkt Cap Share Price  52 Wk % Change Forward P/E 5 Yr Expected P/EG 2 Yr Earnings Growth Forecast Gearing
Santos Ltd STO $14.3b $14.82  +27%  20.3  1.49 29.7% 0
Beach Energy Ltd BPT $1.6b $1.29 -3%   8.6 0.94  -14.7% 6.7%
Senex Energy Ltd SXY $861.7m $0.76 +10% 12.32*  0.47*  26% 0
Drill Search Energy Ltd  DLS $494m $1.16  -26%  6.42     0.11 20.9% 49%
Strike Energy Ltd STX $11m $0.09 -62% 5.6%

Santos Ltd (STO) is the most diversified of the group and has outperformed the ASX 200 XJO Index – an approximate 27% year over year increase versus 15% for the index.  The only other company in the table with positive year over year share price appreciation is Senex Energy Ltd (SXY).  The last company in the table, Strike Energy Ltd (STX) is a junior with minimal, if any, production to date. 

The results from the Moomba-191 vertical well are closely watched.  Australia has not developed the kind of horizontal shale gas wells that drove the US boom.  A research report released by a US based energy investment bank, Tudor Pickering Holt of Houston Texas was impressed by the initial results from the Cooper; it named the region as “one of the best shale prospects outside North America.”  Major international players also have a presence in the region including US firm Conoco Philips, France’s Total, and India’s Bharat Petroleum.

Santos, with its long track record of solid performance and dividend payments, is the big hitter.  Here is a 10 year price chart for Santos:

Despite the GFC and oil price volatility, Santos has rewarded shareholders with a 13.6% total average annual return.  The company’s Half Year 2013 results showed record revenue and a 3% profit increase over the previous corresponding period.  Santos is a big player in the LNG space with its Gladstone and Papua New Guinea facilities.  Both are nearing completion with first production anticipated in late 2014 and again in early 2015.  There are other LNG facilities in Australia that will need supply of natural gas to liquefy as well.  The first to go into operation, Woodside Petroleum’s Pluto, has been successful.

Santos has both oil and gas assets throughout Australia as well as in Indonesia, PNG, Bangladesh, and Vietnam.  BA-Merrill Lynch, Macquarie, Deutsche Bank, and Citi all have Buy, Overweight, or Outperform ratings on Santos.

Beach Energy Ltd (BPT) has oil and gas assets in Australia, the US, Egypt, and PNG.  Like Santos, Beach Energy has taken its investors on a wild but profitable ride over the last ten years with an average 10 year annual total shareholder return of 17.2%.  Here is the chart:

Beach is also in partnership with Chevron Australia and Icon Energy (ICN).  This joint venture has five shale gas exploration wells underway in the eastern half of the Cooper Basin.  In February 2013 Beach sold some its stake to Chevron to fund other exploration prospects.  As of the most recent quarter Beach had $347 million total cash on hand against total debt of $119 million.

Beach has partnership arrangements with Drillsearch Energy Limited (DLS) and Cooper Energy (COE) in other Cooper Basin shale gas assets under development, a total of 300 tcf (trillion cubic feet) of gas in the lands it holds.  The company has an impressive Forward P/E of 8.6 and is currently trading below its book value per share of $1.41.

Senex Energy (SXY) is known as an oil explorer and producer but in 2010 a new management team was appointed.  The old name of Victoria Petroleum was dropped in favor of Senex and a new strategy included an active development program for shale gas in the Cooper Basin.  In April 2012 the company was added to the ASX 200 Index.  Senex is already a major oil producer in the Cooper and its 2011 acquisition of Stuart Petroleum granted the company its shale gas assets.  

Macquarie started covering Senex in September this year with an Outperform rating based on its planned 30 well expansion program in the oil sector.  Credit Suisse, Deutsche Bank, and CIMB Securities have Buy and Outperform ratings on the stock.  The company’s Full Year 2013 results were impressive with a 110% increase in group revenue and a 585% rise in net profit after tax (NPAT).  Analysts were particularly pleased with the 14.6% drop in production costs, with Senex now producing a barrel of oil at a cost of $39.20.  The Forward P/E and 5 Year P/EG numbers in the table were unavailable.  The * indicates standard P/E and P/EG ratios.  Senex is another company that has performed over the long run, with a 16.5% average annual rate of shareholder return over the last ten years.  Here is the company’s 10 year price chart:

Drillsearch Energy (DLS) is another oil explorer and producer looking to expand into unconventional gas.  DLS has the backing of BG Group (British Gas).  On 19 September it announced an ambitious shale gas drilling program involving four wells in the Central Cooper Basin in a joint venture with BG.  Earlier in the year Drillsearch finalised its acquisition of another Cooper Basin player, Acer Energy.  

While Drillsearch has a thriving oil business and valuable conventional gas resources, analysts at JP Morgan have an Overweight rating on Drillsearch, largely due to the company’s relationship with BG on its unconventional gas ventures. 

Drillsearch reported outstanding Full Year 2013 results with NPAT of $45.1 million, up from $10 million in FY 2012.  Revenue increased 356% and earnings per share were up 147%.  Shareholders of DLS over the past decade have had a wild ride, but the stock price is still up 150% over the period.  Here is the chart:

The final company in the table is junior oil and gas company Strike Energy (STX).  At first glance at the numbers, or lack of them, it might appear Strike Energy is suitable only for mad dogs and punters.  However, the company has substantial shale gas and oil assets and other unconventional gas assets in Australia and the US.  The company has assets in two premier sites in the state of Texas – the Eagle Ford Shale and the Permian Basin.  In Australia Strike Energy recently completed an institutional placement raising $9.2 million to fund unconventional gas asset development.  Sceptics who doubt the projected growth in LNG exports from Australia might want to consider a recent milestone for Strike.  It seems Australian chemical manufacturer Orica Ltd (ORI) was concerned about the potential rise in the price of natural gas due to LNG demand in the coming years.  Orica reached a deal with Strike to purchase gas at below market price over the next 20 years.  Strike stands to collect about $52 million in pre-payments by 2016 with the proceeds going towards development of Strike’s gas projects in the Cooper Basin.  

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