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Real Energy Corporation: Background & Economics of the Domestic Oil & Gas Market

Real Energy Corporation: Background & Economics of the Domestic Oil & Gas Market
The Cooper Eromanga Project consists of four petroleum exploration licenses in Queensland’s south west
Mar 01, 2016 By Tim Morris Tags: stocks, RLE, Analysis, Oil & Gas

Real Energy Corporation Ltd (“Real Energy”, “the Company”) is an Australian energy company focused on oil and gas exploration in the Cooper-Eromanga Basins.

Its assets incorporate four petroleum exploration permits covering a total area of 9,523km2 in Queensland’s south west. Whilst certified reserves remain to be defined, contingent resources of 276Billiion Cubic Feet (BCF) gas classified as 2C and 672BCF classified as 3C have been identified. The licenses are estimated to potentially host undiscovered ‘prospective’ resources of 18,261BCF gas.

Real Energy was incorporated in October 2009, and listed on the Australian Securities Exchange (“ASX”) in December 2013. Issued capital currently stands at $24million, or $0.13/share.

Asset Overview –  Cooper Eromanga Project (100%)

The Cooper Eromanga Project (“the Project”) consists of four petroleum exploration licenses in Queensland’s south west. Situated near the border with South Australia, the licenses straddle the townships of Eromanga, Windorah, and Durham, covering a total area of 9,523km2.

The licenses are wholly controlled by Real Energy. ATP917 and ATP927 were acquired from Drillsearch Energy (DLS.ASX) prior to the Company’s Initial Public Offer in 2013, and remain valid until 2019. 

The Company has been selected by the Queensland State Government as preferred tenderer for ATP1161A and PLR2014-1-4, which remain subject to official grant. 

Real Energy has defined contingent gas resources on ATP927. The 2C resource stands at 276BCF and the 3C estimate stands at 672BCF. Across the licenses, undiscovered ‘prospective’ resources total 18,261BCF.

The Project is accessible via 4WD and an airstrip is located nearby at Mt Howitt. Existing gas pipelines run through three of the four permits, connecting to the east coast gas markets.

Background: Eastern Australian Gas Prices Have Doubled since 2011

Existing gas pipelines surrounding Real Energy’s licenses are in place to service the Cooper Basin’s prolific oil and gas industry.  The Cooper Basin has been producing commercial hydrocarbons since the late 1960’s.

It presently accounts for over 16 per cent of national crude oil production and 12 per cent of sales gas production. Over the past decade, crude oil output from the Cooper Basin has approximately doubled to 13.4million barrels, however its sales gas output has declined significantly.

In the early 1980’s, the Cooper Basin accounted for 40 per cent of Australia’s sales gas production. However with output contracting by more than half since 2000, the Cooper Basin’s gas output is now at the lowest levels since the area was first developed.

Impetus for change is driven by a combination of advancement in drilling technology and a structural shift in the dynamics impacting Australia’s east coast gas markets.

Scheduled to consume approximately five times more gas per annum than east coast domestic demand, four Liquified Natural Gas (LNG) plants due for commissioning in Queensland are poised to open up local markets to world linked gas prices for the first time.

Historically east coast domestic markets have been characterised by benign pricing, below regional benchmarks, however dynamics have begun to shift. 

Since 2011 indicator gas prices for major east coast markets have all firmed, with Sydney and Adelaide benchmarks approximately doubling. Reprieve triggered by contracting world commodity prices in late 2014 appears to have been temporary.

Impetus to develop the Cooper Basin’s remaining gas inventory is therefore gaining momentum. Buoyed by a sustained period of  elevated pricing, advancements in drilling technology paved way to a more than doubling in Cooper Basin oil production since 2010.

The domestic gas pricing regime is now becoming conducive for application of these technologies toward gas extraction. The US Energy Information Administration has estimated that the entire Cooper Basin has a risked recoverable shale gas resource of 85 Trillion Cubic Feet (TCF)1.

By comparison, the Cooper Basin’s cumulative gas production to date stands in the order of 7 TCF, with current output levels more than 60 per cent below peak witnessed 15 years earlier.

Real Energy's Development Strategy

Since acquiring licenses underlying the Cooper Eromanga Project in 2013, Real Energy has focused on resource identification and estimation. Investment has been directed to ATP927, which has not previously been subject to exploration drilling.

Under exploration is characteristic of the Queensland section of the Cooper Basin where Real Energy is operating. Whilst 73 per cent of the Cooper Basin is located in Queensland, the state has hosted less than 40 per cent of wells drilled, with most attributed to the South Australian section2.

In conjunction with this thematic, and the benign domestic gas price regime prevailing at the time, previous operator of ATP927 and ATP917 did not conduct any wells after procuring the permits as part of a larger package via Government tender in 2007.

Real Energy commenced exploration on ATP927 in 2014. Two exploration wells have been drilled, both of which generated free flows of gas to surface. The discovery facilitated the Cooper Eromanga Project’s first contingent resource estimate, which now totals 276BCF in the 2C category and 672BCF in the 3C category.

Real Energy estimates the geological formation hosting these resources extends throughout ATP927 and 60 per cent of ATP917, however its current focus is appraising recoverability of the resource.

The Company has interpreted the resource to be ‘Tight’ / ’Basin Centered Gas’, which is  generally hosted by sandstone, albeit with lower porosity than conventional gas.

Real Energy is therefore preparing a well stimulation program encompassing staged fracturing. Management estimates that initial flow rates of 2-3mmcf/day to be the threshold required to expedite further commercial development of the field.

Demonstrating flow rates of this magnitude at a reasonable cost would allow the Company to simultaneously – execute a gas sales agreement (“GSA”); upgrade existing contingent resources to the reserve category; and accelerate exploration across the Project.

A Letter of Intent (“LOI”) has been executed with Incitec Pivot Ltd (“Incitec Pivot”; IPL.ASX), which consumes approximately 40PJ gas pa to support its domestic chemical and fertiliser processing activities. The LOI represents a pre cursor to an official GSA, and to a significant degree focuses the major development risks on recoverability and funding.

Economics of Real Energy: Potential to Host 100-300 Wells

Execution of the existing well stimulation program is expected to cost $4million. If successful, Real Energy estimates commercial field development would require an outlay of approximately $4million - $5million per well, which includes fracturing and completion. Additional capital expenditure in the order of $25million is required to connect the field to existing pipelines.

The major risks surround each well’s initial flow rate, subsequent rate of decline, and the potential for capital expenditures to exceed budget. The Company estimates initial flow rates post stimulation of 2-3mmcf/day are required to achieve breakeven.

Exploration wells, Tamarama-1,and Queenscliff-1, witnessed initial unstimulated flow rates in the order of 0.4mmcf/day and 0.2mmcf/day, respectively. Based on intelligence derived from the 300-400 wells fracture stimulated in the Cooper Basin to date, Real Energy is targeting flow rate benefits in the order of ten fold.

Based on existing data and management projections, we estimate individual well capital expenditures could be repaid within each well’s first year of production, and that 95 per cent of well revenue is generated during its first four years of production.

Assuming stimulation activities are successful, existing contingent resources underlying Real Energy’s licenses have the potential to host in the order of 100-300 wells. The Incitec LOI envisages delivery of 11PJ gas per annum at market linked prices.

We understand expansion beyond this point would require Real Energy to construct its own processing facility at a capital outlay in the order of $75million.

 

Financial Performance: RLE is Reliant on External Capital

As Real Energy’s assets are currently in the exploration phase, the Company does not presently generate revenue and is reliant on external capital to fund operations.

During FY15, Real Energy expended $13.75million on exploration and development. From these activities a $6.4million Federal Government Research and Development tax incentive rebate has been lodged and is currently classified as a receivable. As of June 30 its cash position was $3.7million.

To date Real Energy has financed operations via equity. Its most recent fund raising exercise was the December 2013 Initial Public Offer, which raised $10million at $0.25/share, expending shares outstanding by 24 per cent. Issued capital currently stands at $24million, or $0.13/share.

Investment View and Valuation

Real Energy’s investment appeal rests in the development potential of its Cooper Eromanga Project and scale of its license holdings....

 

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Tim Morris Author: Tim Morris Mar 01, 2016

Having studied Commerce and Science at the University of New South Wales, Tim began his career in an analytical capacity with Wise-owl. Tim has conducted over 500 corporate valuations and appraisals, specialising in pre revenue assets and emerging markets. For the last five years, his Equity Capital Market insights have been featured as part of a weekly column in The Australian and regularly features on Sky News, CNBC, ABC and Bloomberg TV.

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