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Date : 11/03/2022

Comet Ridge

ASX :

COI

Market Cap : $111.80 Million

Buy

52 Week Range : $0.055 - $0.150

Share Price : $0.13

Comet Ridge is a compelling gas play that will play an integral role in Australia's domestic supply. We recommend a 'Buy'.

Company Analysis

Comet Ridge (ASX: COI) focuses on developing coal seam gas resources for the east coast Australian market. The company has tenement interests and a suite of prospective Queensland and New South Wales projects. Comet Ridge’s flagship Mahalo Gas Hub projects are low cost, sales spec gas blocks close to Gladstone.

Additionally, the firm has exploration assets in the Galilee and Gunnedah basins that offer further upside amid increasing domestic and international demand for natural gas as a source for cleaner energy and as a key manufacturing feedstock that makes thousands of products used daily.


Source: Tradingview.com

Since our earlier report, Comet Ridge has traded flat with all the volatility affecting the markets. This offers a chance to gain entry into a solid company or top up existing holdings.

A quick recap before diving into the recent updates:

During this period, that is, since our initial coverage, Comet Ridge has fortified its fundamentals with key developments in its projects. The last 12 months have shown consistent progress, and the firm has been reporting testing updates that show good positive progress.

Comet Ridge holds 100% equity in three project areas in the Mahalo Gas Hub area and a 40% interest (increasing to 70%) in the Mahalo Gas Project. The current net acreage area for Comet Ridge across the Mahalo Gas Hub is substantial at 1,250 km2, with a large part of these blocks sitting over the highest productivity Mahalo shallow fairway.

This fairway has been extensively appraised and has produced 1.4 MMcfd (million standard cubic feet of gas per day) from a lateral pilot well (Mira 6) drilled only 924 metres in coal.

A summary of each of the permits in the Mahalo Gas Hub area and the current status is shown below:

The Mahalo Gas Project that was formally awarded two Petroleum Leases is Comet Ridge’s flagship gas project. Once in production, it will provide the scale and infrastructure to underpin the development of Comet Ridge’s 100% owned blocks in the Mahalo Gas Hub.

The Mahalo Gas Project, focussed initially on the shallow fairway in PL 1082 and 1083, is currently a joint venture between Comet Ridge (40%), Santos (30%) and APLNG (30%). Comet Ridge and APLNG have agreed on a transaction for APLNG to exit the block, with Comet Ridge acquiring APLNG’s equity share. This will increase Comet Ridge’s share to 70%.

At the same time, Comet Ridge executed a funding and option agreement with continuing Mahalo Gas Project partner, Santos QNT Limited, whereby Santos may increase its equity interest in Mahalo from 30% to 50% and acquire 50% interests in Mahalo North (ATP 2048) and Mahalo East (ATP 2061). During the December 2021 quarter, the Mahalo joint venture parties have materially progressed the conditions required to be satisfied before completing the Acquisition.

The initial focus for the development of the project will be in the two Petroleum Lease (PL 1082 and PL 1083) areas that were awarded to the Mahalo joint venture participants in June 2020 and have been heavily appraised to date, with strong flow rates and 2P reserves independently certified. The project is located 65km to the north of infrastructure connecting the east coast gas market and Gladstone LNG export terminals.

Company Updates

Mahalo North (ATP 2048) – Comet Ridge 100%

Mahalo North North (Comet Ridge 100%, operator) is highly prospective (450km2 block) located directly north of, and contiguous with, the Mahalo Gas Project. The block was formally awarded to Comet Ridge by the Queensland Government in 2020. Gas produced from Mahalo North is subject to domestic supply conditions, meaning that it cannot be supplied other than to the Australian domestic market (unless there is an offsetting domestic sales volume from another project via a swap arrangement).

Comet Ridge has undertaken subsurface analysis utilising the significant volume of the detailed well and seismic data for the permit, principally from historical coal and petroleum exploration. The third-party, high-quality seismic data has increased the company’s confidence in the productive coal fairway and the ability of strategically placed pilots to deliver significant gas volumes. This means that appraisal and initial development well locations can be chosen based on the available data.

Drilling Program and Appraisal Program

During the December quarter and into January 2022, Comet Ridge has undertaken the following appraisal work program:

  • Drilled Mahalo North 1 vertical well and cored to confirm key coal reservoir data from lab analysis;
  • Drilled a dual lateral well (Mahalo North 2), which intersected Mahalo North 1 through the target coal reservoir;
  • Completed Mahalo North 1 with downhole pump, production tubing and pressure gauge in preparation for production testing;
  • Installed surface production equipment including water storage tanks, gas-water separator, flowlines and flare stack; and
  • Commenced production testing of Mahalo North 1 on 14 January 2022.

Results from drilling the Mahalo North 1 vertical well and Mahalo North 2 dual lateral well have been very positive and exceeded Comet Ridge’s pre-drilling expectations.

The Mahalo North production test commenced on 14 January 2022, with the downhole pump started at low speed and water being produced to the on-site water storage tanks. After starting the downhole pump and initially achieving 110 barrels of water per day (bwpd), the pump speed increased, and the water rate increased to 141 bwpd. Over the coming weeks, the pump speed will be progressively increased to draw the bottom-hole pressure down in a controlled manner, significantly increasing water flow from the well. This will reduce pressure in the reservoir over a wide area around the well to enable gas desorption from the surface of the coal and the production of both water and gas to the surface for measurement.

Based on the company’s experience from the very successful Mahalo 7 and Mira 6 production tests in the main Mahalo Gas Project just to the south, a slow and controlled reduction in pressure in the reservoir in this manner allows these particularly productive fractures in the coal seam to remain open and the best possible gas flowrate to be achieved. This process follows how production wells would be brought online in development.

Comet Ridge expects that strong water and gas rates should be expected based on the excellent permeability already observed in Mahalo North 1 and the high fluid losses experienced whilst drilling both lateral sections of Mahalo North 2. In anticipation of these higher water and gas rates, Comet Ridge has secured a larger water storage tank which is now expected to be installed next month.

Industry Analysis

The Russia-Ukraine war brings forward opportunities for Australian Coal Seam Gas producers.

Russia export market: Disrupted by international sanctions: Natural gas is traded internationally by pipeline or shipped as LNG. Russia’s exports account for 26% of international pipeline trade and 8% of LNG trade. About 77% of these exports go to European countries and account for about 40% of Europe’s total natural gas consumption. Dependence varies. Nine countries rely on Russia for more than 90% of their gas imports: Bulgaria, Czech Republic, Estonia, Finland, Hungary, Latvia, Romania, Slovakia, and Slovenia.

Australia is the world’s fifth-biggest natural gas exporter: It exclusively exports natural gas as LNG and is now its largest LNG exporter, accounting for 22% of international trade. Historically, more than 99% of Australian LNG has been exported to Asia, mainly China, Japan, and South Korea. Australian LNG could be used in “swaps”. These involve swapping an LNG cargo in one part of the world with one closer to where a buyer wants it delivered. This may allow, for example, American LNG to be diverted to Europe and Australian LNG to replace it in Asia.

Australian LNG exporters will benefit from higher global prices: The good news for Australian consumers is that those higher prices largely won’t flow through to domestic prices. Australia’s domestic gas prices are about 70% lower than overseas due to government measures to quarantine Australian customers from international prices and guarantee secure and affordable gas to the country’s east coast market.

Despite the controversial aspect of CSG, it is clear that this resource offers some highly lucrative export opportunities for the developers, such as Comet Ridge, particularly as gas prices are currently high.

Bowen Basin Study

The Queensland Government’s Department of Resources released a report prepared by KPMG, GHD and NSAI in December 2021 (Report) which investigates the potential of unlocking future gas supply from the Bowen Basin in Queensland. The report confirms new upstream sources of gas supply are required from as early as the mid-2020s to avoid long-term shortfalls in the East Coast Gas and export markets. The report concludes the Bowen Basin is potentially in a prime position to meet the State’s needs due to its existing infrastructure, existing production and extensive exploration and appraisal activity. In particular, the Moranbah, Blackwater and Mahalo regions were noted as the most likely to provide the new production sources to fill the demand, with the Mahalo region already being close to existing infrastructure. The report also examined several options for gas pipeline export from the Basin. It noted at least two of the routes pass very close to the Mahalo Gas Hub area to connect with existing infrastructure near Rolleston.

Investment Thesis

The investment case for COI is mainly based on:

  • Comet Ridge’s purchase of APLNG stake (30%) unlocks the Mahalo Gas Hub for development.
  • COI is fully funded for APLNG acquisition, appraisal at Mahalo North (100% owned) and working capital requirements.
  • The firm is eyeing a significant increase in 2P and 3P Gas Reserves from APLNG acquisition and completion of pilot well testing.
  • Early Mahalo North pilot well results are very positive, signalling strong gas potential.
  • Multiple options for project commercialisation (near term) are emerging to take advantage of strong gas markets and current pricing.

Galille Basin, Qld

Activities in the Galilee Basin projects in the recent December quarter have continued to focus on technical work that will secure tenure via renewal of certain areas of Authorities to Prospect (ATP) 743 and ATP 744, and underpin securing the large resource areas with Potential Commercial Area (PCA) applications to the Queensland Government.

Detailed geological and geophysical work continues to refine the geological model for the Gunn CSG Project Area across ATP 744 and ATP 1015. This area is over 2,100 km2, with an initial CSG focus area of approximately 950 km2.

This upgraded model will be used to identify development options using geological characteristics and concept well designs. The geological model will also underpin a revised CSG resource assessment for the Gunn CSG Project area over the PCA areas from within ATP 744 and ATP 1015.

Gunnedah Basin, NSW

Comet Ridge’s two contiguous NSW licences (PEL 427 and PEL 6) cover a total area of 10,926 km2. They are located in the northern Gunnedah Basin, immediately north and northeast of Santos’ Narrabri CSG Project in the Bohena Trough.

Comet Ridge currently holds between 29.55% and 59.09% CSG equity interests across these licences and between 97.5% and 100% conventional equity interest. Comet Ridge is the conventional operator, whilst Santos operates the CSG interest. There has been minimal activity in the NSW licences during the current quarter following the NSW Government Future of Gas Statement release on 21 July 2021. In this Statement, the NSW Government, on one hand, seems to support a gas industry as critical for manufacturing, but at the same time has undertaken to restrict gas activity outside the Narrabri Gas Project area. Comet Ridge advised that it is unclear on the NSW Government’s intentions to renew PEL 6 and PEL 427.

Mahalo North production testing update

The production testing operations are focused on the high-productivity fairway in the southern part of ATP 2048, approximately 3.7km to the north of the existing Mahalo Pilot Scheme. Since the commencement of production testing at Mahalo North 2/1 1 on 14 January 2022, the downhole pump has performed as designed, with Comet Ridge initiating a consistent series of pump speed increases to facilitate the de-watering process.

At the end of February, the well produced approximately 508 barrels of water per day. The pumping rate will continue to be steadily increased by Comet Ridge over the coming weeks.

Material gas production at Mahalo North 2/1 is expected to take several months to develop. The coal reservoir pressure is progressively reduced by increasing the pump speed to remove water from the coal. In anticipation of higher water and gas rates during the production testing phase, Comet Ridge has now completed the installation of the third and largest water storage tank. This will provide Comet Ridge with significant water handling facilities for the production testing phase.

Our earlier, detailed coverage of Comet Ridge can be viewed by clicking here.

Recommendation

Comet Ridge is a very compelling gas play. They have the Australian East Coast gas supply in their sights with their project close to infrastructure and the east coast market. The company has made consistent progress and is positioned well to take advantage of the Australian east coast’s struggles to contain rising demand for gas. Therefore, the timing of the development is positive, with domestic supply requiring bolstering and the international gas market being thrown into chaos for the short-to-medium term. We continue to issue a “Buy” recommendation for Comet Ridge.

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