JUST FOUND THIS ON HOTCOPPER:
Like the Panteen shampoo comercial. It won't happen overnight....but it will happen!!!
For the benefit of all the new investors looking at ESG, and some of the older ones who may have been getting jaded by all the shorting and downramping (yes, you SomeGUY : ) ), it might be time for an executive summary of ESG, and the trends surrounding it.
(feel free to chip in any extra info that I have missed).
ESG SPECIFICS
- ESG already have 988PJ of 2P. At average transaction metrics, and according to DC, this is worth $2.4 billion. So, over 3 times the current price. And that is based on 6 month old data.
- Since then, ESG have been production testing 3 seams for the first time ever.
- There is an estimated 17TCF in just PEL 238.
- The flow rates ESG have already reported are incredible from ESG thinnest seam - 2MMCFD en route to a forecast 3.5MMCFD. And with ESG demonstrating they can have large spacings between laterals, it means great economics for full field development. High flows and large spacings = lots of gas for less money. This also means a much smaller footprint.
- ESG has signed two huge MOU's recently, one with ERM Power, one of the biggest privately owned companies in Australia (who are looking to list publicly), the other with the massive Japanese consortium of Hitachi-Toyo to examine a scalable LNG plant in Newcastle. Hitachi also allude to the fact that there are deals in the wings for offtakes from this project.
- ESG has a size resource that rivals QGC. So, easily big enough to support the massive deals we have seen signed with the Chinese ($50 billion).
- ESG is tightly held by management. (over 10%) Thus, they are highly motivated to get the best possible deal for shareholders.
DEMAND
- Asian demand is strong. The number of deals in the gas sector demonstrate this beyond a doubt. China, Japan, India, Malaysia etc. all need gas to underwrite their economic development. And there are competitive tensions between these Asian buyers to secure gas resources.
- There are very few countries in the world who have large gas resources that are open for investment for multi-nationals. The rise of State-Owned resource companies locks up much of the world's gas. Only Australia, the US and Canada have large and open markets for gas investment. So this is where the majors are going shopping.
- That Australia's CSG is in demand by multi-nats is evident in the $30 billion worth of investment (so far) in QLD. Shell, BG, ConocoPhillips, Petronas... a who's who of international players buying into CSG. This is the sector ESG is in.
- NSW electricity to be privatised, meaning new power plants to be built. These will be gas-fired. The market is suddenly going to expand in size.
- No new coal-fired plants will be built in this country. NSW planning to introduce a ban on new coal-fired. ESG has the dominant gas reserve in the biggest state. Geographically central. Strategically valuable.
- Carbon emissions will have to drop. So, one way or the other, a price of carbon is coming. Gas will benefit. It is 'carbon-light', and will take the bulk of the base-load that renewals cannot in the short-medium term.
- The LNG projects in QLD will cause the price of domestic gas to rise - parity pricing. This is a huge benefit to all gas producers, exporters or not. Santos and Origin know this, as does AGL and TRU. You need to control the resource from source, or else be a price-taker.
- NONE of the LNG projects in QLD have the requisite gas to meet their size ambitions. And if and when there is to be consolidation between these companies, they all want to be the larger and more dominant player in an mergers or JVs. As such, there is considerable competitive tension for each of them to secure the unallocated gas resource, and get to the scales of economy to maximise their project returns.
SANTOS
- Missed out on QGC in a bidding war, who later signs a $50 billion offtake deal with the Chinese. Darn.
- Santos buys into ESG and PEL 238 subsquent to this. PEL 238 gives them gas rights, the ESG gives them nothing except a stepping stone to attempt a full acquisition.
- Santos have already shown a willingness to pay $1.00 per share for ESG based on much lower 2P reserves.
- Santos holding in PEL 238 gives them strong synergies with their other Gunnedah holdings (which are some way back in the development cycle).
- Santos is making the Gunnedah basin a major focus, with a new regional office set up there in the last 9 months.
- Santos say ESG's resource is one that they will "die fighting for".
- In 12 months since becoming ESG shareholders, there have been no commercial deals of any sort done with ESG, or with PEL 238 - so where is the commercial benefit that Santos have achieved? Not only that, ESG have been signing deals with third parties independently, not as as JV with Santos in PEL 238.
- Santos are looking to sell down an equity share in GLNG, freeing up more capital.
- Santos have $2 billion in cash, free cashflow, and a debt facility of $3 billion. They will have more gas after they sell down and equity share of GLNG.
- Santos would benefit from the supply-point flexiblity that ESG's gas could give them. As a major domestic supplier, a NSW resource would give them the ability to do 'gas-swaps'.
- Santos would benefit greatly by having sufficient 2P reserves for a second LNG train at GLNG. The capex for the first train is around $8 billion, whereas the second train would cost an extra $4 billion. So the ability to commit to a second train is highly attractive.
- Santos' 2P reserve growth has been slow in the last 12 months. In order to make an FID on a two-train project, and attract equity/offtake partners, they need to demonstrate they can deliver of 2 trains worth of 2P reserves. And, they cannot do that based on their current 2P reserves and growth curve.
SUMMARY
So, we have a commodity in strong demand in a growing region, and in a lower-carbon environment. We have gas resources hard to secure for multi-nats, and a growing domestic market for power-gen. We have ESG with a known massive and growing resource and reserve. We have a large shareholder who previously missed the prize with QGC, unable to obtain any commercial deals with ESG, and an imminent FID on their project which is short of gas. And we have consolidation likely to happen this half (with Santos' FID already delayed twice).
Meanwhile, we have ESG being very quiet publicly but clearly doing deals in the background. And ESG share price being shorted in the last 9 months - who would short a known takeover target..?
And, we know that the vast majority of companies with massive resources tend to go up the food chain, as the big resources get together with big capital. And this process of course means strong share price gains for the companies who go up the food chain.
No conspiracy theories here. Just research, business fundamentals and common sense.
I will leave you all to work out what is like to happen next...