Shares in Value Logo
Product Review Img Vertical

Date : 10/11/2021

Kinetico Energy

ASX :

KKO

Market Cap : $58.58 Million

Buy

52 Week Range : $0.08 - $0.165

Share Price : $0.095

Well funded project with multiple commercialisation channels. We recommend a Buy.

Company Analysis

Kinetiko Energy (ASX: KKO) is a gas and coal bed methane (CBM) exploration company seeking to supply South Africa’s significant unmet energy demand. The company has interests in 5 permits covering ~4,600 km2, with 2.4 tcf of net 2C contingent resources. Kinetiko is looking to commence selling gas by restarting existing wells, followed by a 3rd party-funded 20-well pilot program, delivering production of ~1-2 TJ/d by year end. Successful demonstration should lead to a 300 well project commencing in late 2022, delivering production of ~12 TJ/d, with later expansion to 100+ TJ/d.

Kinetiko Energy is the largest continuous landowner in the heart of the Permian Age Coal Fields. The project area covers 7,000km2 with 4,604km2 of granted exploration rights. The Permian Age Coal Fields are proven and highly prospective, and they equate to about 2% of Africa’s landmass.

In addition to possessing a premium land position with large strategic resources, Kinetiko has significant infrastructure in place to take their gas to market. Power stations, gas pipelines, high voltage transmission lines, road and rail are all adjacent to exploration areas.

Kinetiko operates their flagship Amersfoort Project. It is an independently certified contingent 2C gas resource of 4.9 TCF. Exploration programs conducted have proven the existence of large accumulations of on-shore, shallow gas with strong flow rates, that host the potential to develop a significant gas production field. The gas is found in both the sandstone and coal formations across both ER 38 and ER 56, with gas identified in every exploration hole drilled to date.

The average depth of all holes drilled, ranged from 150M to 550M. This is relatively shallow in comparison to other on shore CBM gas fields globally. Coal seams identified are between 1M and 4M with cumulative coal measures of up to 25M.

Initially, 20 exploration core holes were drilled. This culminated in significant gas shows in both downhole logging and laboratory canister desorption. Of the 7 permeability pilot test wells drilled using a simple barefoot completion method, all wells spontaneously flowed gas to the wellhead.

Through further exploration and the continued successful use of an aeromagnetic survey, the focus will be to expand the gas field and to quantify the resource. As further exploration is carried out on ER 38, this will test deeper formations and probable higher gas pressures than encountered in ER56 on drilling of more permeability test wells.

The location and unique geological characteristics of the Amersfoort Project makes gas production achievable in the short term.


Source: KKO

Early production is on the Cards

There are 4 characteristics that make early production possible for Kinetico:

Extended Flow Testing – Endress & Hauser AG of Switzerland and Franklin Electric Co. Inc of the US are world leaders in the design and provision of process control and well pumping systems. They partnered up to test an innovative pumping, separation and control package that was trialled on the previously successful flow-tested well KA-03PT. The estimated cost of equipment installation and monitoring amounts to circa AUD$950,000.

The 1st phase of equipment testing was carried out between the 3rd – 7th of September 2018 and intended to provide data on equipment performance and well flow characteristics. The following outcomes were achieved,

  • The integrated system achieved a much higher level of water / gas separation efficiency.
  • The tested wellhead separator and control systems deliver possible major commercial advantages for field development. Potentially one separator and control system package serving multiple wells as opposed to one well utilising one wellhead separator and control system.
  • An absolute open flow rate of 300Nm3/hr was achieved at a 2.15bar wellhead pressure without any well clean up or other optimised parameters.
  • Gas quality is at the exceptional level of 99.5%, methane was >1% above previous levels and could eliminate the need for treatment prior to monetization.
  • Initial indications from the installed system are a 95% recovery of gas from produced groundwater, a significant increase from previously used separation equipment.

Interval and Isolation well completions – Amersfoort exploration drilling and production wells are relatively inexpensive as compared to other gas exploration scenarios.

The shallow depths for drilling of exploration and production wells is a main driver for keeping costs low and thus strengthening the project economics. To date drilling permeability test pilot wells at Amersfoort have utilised cost-effective and simple, open hole or “Barefoot” completion.

As structural and geological understanding has advanced, zone interval and isolation drilling will now be adopted as part of the drilling program. This will take well efficiencies and production profiles to the next level. Let’s the gas out, assists with lowering water production and avoiding a profile that is not productive.

A production well based on this completion method will cost approximately $600,000 AUD. The fully engineered solution will further increase our knowledge of the production field profile, while in simple terms letting more gas out and keeping a greater amount of water in the ground.

Geological Interpretation aeromagnetic survey – Flying aeromagnetics is an effective means of imaging the location, detail, and extent of, dolerite sills, dykes, and faults, while defining gas reservoir compartments and major geological boundaries/structures in the project area.

There is a strong magnetic contrast between the Karoo sandstones, shales, dolerite sills and dykes. This allows for the appropriate data processing and modelling enabling reservoir geology to be modelled down to basement depths.

Economics and offtake – Drilling and well completion in this scenario are relatively shallow and inexpensive as compared to other gas projects given the nature of the Amersfoort geology. The gas is of a very high quality and purity and water production at current levels is manageable.

  • Pilot test well KA-03PT has flared over 26 million Scf in 6 months.
  • Sustained rate of 332mscf/d for first 6 weeks.
  • Water production stabilsed at 4,000 litres per day.
  • If the gas had been sold under prevailing RSA gas prices of $7 – $10USD /GJ*, say $10/GJ, payback would have easily been achieved in 10 months given well costs of ~ US$ 220,000 un-engineered (Barefoot completion).
  • Revenues of US$ 260,000.
  • At $10/GJ breakeven drill and completion is achieved from peak flow of 48 mscf/day and ultimate recovery of 0.08Bcf per well. Does not include field infrastructure, overhead and associated costs.

Characteristics that sets Kinetiko apart

Large gas resource onshore South Africa: Kinetiko offers exposure to multi-tcf CBM and conventional gas resources in energy short South Africa. Potential markets include CNG, diesel replacement, gas-fired power generation and feedstock for South Africa’s gas-to-liquids industry. Low drilling costs (~$US0.35m/well) and high gas prices (~$US7/MMBtu) provide attractive economics, with an estimated IRR after tax of over 30%.

Value proposition: Kinetiko has a 49% interest in 4.9 tcf of 2C net resources across five largely contiguous permits. We estimate development of 20% of that amount (~1 tcf gross) would supply 120+ TJ/d and deliver free cash flow of $60+m/yr over a 15-year plateau period.

Good location in energy short market: Kinetiko’s permits are located close to South Africa’s industrial and population centres (Johannesburg, Durban). Rising regional energy demand, constrained coal fired power generation and declining gas pipeline imports offer scope for new gas markets.

Demonstrated gas flow to surface: Previous pilot wells have delivered gas flows of up to 350 kscfd and evidence of recharge during shut-in periods. Demonstration of sustained production from both sandstones and coals and repeatability over the project area is required to confirm project economics.

Funded pilot program: Kinetiko has started a 20-well pilot program, with the $15-20m project funded by a major South African institution. The project has approval for initial gas sales of 500 MMscf/y (1.3 MMscfd), with offtake arrangements currently being negotiated.

Multi-permit optionality: Kinetiko’s operatorship of its five permits and high equity interest provides options for staged farm-down to fund future development and monetize its resource base in advance of gas sales.

Price catalysts: Commencement of multi-well pilot; resource upgrades and maiden reserves; confirmation of well performance parameters; gas sales agreements; further exploration outcomes, expanded project FID.

Company Updates

Chart Description automatically generated
Source: Tradingview.com

Kinetico has been busy recently. They have made an acquisition, raised funds, appointed a new CEO, and much more.

Kinetiko acquires South African Gas Project

In May 2021, KKO executed a binding terms sheet with Badimo to acquire the remaining 51% of Afro Energy (Pty) Ltd, making KKO the 100% owner of all South African exploration rights and production approvals. The transaction metrics highlights are summarised as follows:

  • The ownership of 100% of the South African assets under one listed entity provides a wide range of financing options to develop the project.
  • Alignment of one board and management team will streamline development and exploration initiatives and deliver cost efficiencies.
  • Delivers a net contingent resource of 4.9Tcf (2C) to KKO1.
  • Provides a larger, more suitable market capitalisation for institutional investment which will enhance liquidity.

Funding bolsters position

A few months later, for the first time in 4 years, KKO raised funds from outside their existing shareholders. The firm announced that it has received firm commitments from sophisticated and professional investors to raise approximately $2.8 million at 10 cents a share via a Placement. Additionally, KKO also offered a Share Purchase Plan to further raise $2 million at the same price.

Funds from the Placement will be used to advance the Company’s Amersfoort Project, including funding exploration and gas drilling. Specifically, funds will be applied towards aeromagnetic surveys, exploration core drilling, interval test drilling, pilot production costs and general working capital purposes.

New CEO bolsters Board + Insider Trades

Nick de Blocq has been appointed as chief executive officer with more than 33 years’ experience in the global oil & gas exploration and production industry with major companies such as Schlumberger, Frank’s international, SEPCO Industries and Moz Environmental.

He has an extensive managerial and operational skill set with multi-country general management, operations, business development, sales, and marketing, including roles as a continental Vice President for an American corporate and more recently the Country Manager and COO for regional companies in both East and West Africa.

Executive Chairman Adam Sierakowski topped up his holding in KKO by another 300,000 shares at a price of $0.094 – bringing the total consideration to $28,000. This transaction certainly brings down the risk levels for us retail investors.

Exploration

Rigs have been mobilised for drilling activities to approved and known gassy site locations wells adjacent to existing pilot production wells on Amersfoort project ER56 (now ER271 North). The new wells will be the first drilled on the project in 8 years and with the deployment of updated technology and geological data represents an exciting new exploration phase for the Company. Negotiations have started with suitable drilling companies who have rigs and teams available.

Earlier last month, KKO announced that they have significant new exploration commencing and specifically the first new gas wells being drilled in over 8 years.

The Company has been in the process of negotiations with a number of drilling and related contractors in both South Africa and Botswana and has completed an engagement with Torque Africa Exploration who has the largest fleet of drilling rigs in the sub-continent and vast expertise in the drilling required on the Korhaan project. The upcoming three-well drilling program to be drilled within 400 metres of KKO’s proposed gas collection terminal at Amersfoort where access and infrastructure is being established, focusing on developing new gas discoveries and potentially creating a 5 well pilot production cluster. The Company has also engaged experienced contractors to perform the well cementing and wireline logging all of whom are mobilising to site.

The three new wells named Korhaan-3, Korhaan-4 and Korhaan-5 are estimated to reach a depth of up to 450m to test the gassy sandstones and coal bed methane (“CBM”) horizons from the known coal beds that were intersected and observed to be gassy from adjacent (400m away) flow tested gas wells KA 03PT2 and KA 03 PTR (now known as Korhaan-1 and Korhaan-2). The program will comprise two drill rigs with the first rig (B21) spudding Korhaan-4 as early as next week and doing a percussion/air-drilled well. The second rig (B16) will spud Korhaan-3 two weeks later and drill with a rotary mud system through the 300m production interval. Rig B21 will then drill Korhaan-5 using percussion/air once more, expecting all drilling activities to be completed by early December. All three wells will be flow tested after logging. The Company intends early in 2022 to return and cast, cement and perforate each well in order to maximise gas production while minimising or negating water ingress.

In addition to drilling, the company will continue to fly aeromagnetic surveys on newly granted exploration rights ER 270 and ER 272 for the purpose of targeting further gas compartments. These flown surveys are anticipated to be undertaken during Oct/Nov and data procured during Dec.

Aircraft have been confirmed to commence flying 13,479 line kilometre surveys covering 564km2 over selected portions of ER 270 and ER 272 which form the most Southern and Northern extensions of the Company’s exploration rights. The Company has contracted Xcalibur Airborne Geophysics (Pty) Ltd, whom it has used successfully for all its previous airborne surveys and anticipates the results from the survey to be available later next month and will assist targeting areas for well tests and further pilot production fields.

Industry Analysis

South Africa is a significant coal consumer and exporter but produces little conventional oil or gas. The country has a highly developed synthetic fuels industry and the third-largest oil refinery system in Africa (545 kbd, behind Algeria 650 kbd and Egypt 800 kbd).

Natural gas makes up ~3% of the total primary energy mix and this is expected to increase to ~10% over the next decade, still well below OECD economies such as Europe (24%) and the US (28%). The industry is at an early stage of development with limited internal competition. Barriers to entry include a lack of infrastructure, high capital costs, community concerns regarding hydraulic stimulation and the lack of an industry development program. Shale gas exploration was halted in 2011 by government moratorium.

A PwC report commissioned by Kinetiko concluded that the discovery of significant new indigenous reserves would have a disruptive effect and create opportunities for new entrants. The bulk of South Africa’s gas requirements are imported by Sasol via pipeline from Mozambique. The ~200 PJ/yr ROMPCO pipeline3 mainly supplies Sasol’s Secunda and Sasolburg petrochemical plants.

A shortfall of gas of 220 TJ/d (80 PJ/yr) in Johannesburg is being estimated and stated that the Industrial Gas Users Association of South Africa predicts an imminent supply “crunch”, due to depletion of Mozambique’s field. Renergen estimates LPG demand of ~60 TJ/d (22 PJ/yr) and plans to commence production of 50 tpd LNG in 2021, sufficient for 400 trucks, rising to 300 tpd (5,000 trucks). We estimate this will require production of ~3 MMscfd, rising to 18 MMscfd from Renergen’s Virginia biogenic gas project.

South Africa has a large power industry, accounting for more than 80% of the electricity generated and consumed in southern Africa (via the Southern African Power Pool). Demand has effectively outstripped supply since 2007/8 and South Africa has progressively reduced its export generation commitments, exacerbating the shortage in neighbouring countries. Despite a 75% electrification rate nationwide only 55% of the rural population has access to electricity (c.f. 88% in urban areas). According to 2009 IEA data, ~12.5 million people had no access to electricity. The country is targeting additions of over ~40,000 MW from 2020 to 2030, primarily from coal. Power prices have risen approximately three-fold over the 10-year period from 2008 to 2017.

Investment Thesis

Timeline Description automatically generated
Source: KKO

KKO is progressing well with respect to their roadmap. As for the next milestone, Afro Energy is in advanced negotiations with potential gas off-takers for small and intermittent gas production from our Korhaan collection of wells (initially, wells KA-03PTR, KA-03PT2, KA-07PT, KA-08PT and KA-09PT) where current potential off-takers are looking at CNG, LNG and in-field power generation solutions.

Afro Energy has modelled a 15-20 well pilot production field on ER56 which it has been seeking institutional funding to develop. Positive responses have been received from potential funding institutions both inside South Africa and abroad to fund and participate in the development of a pilot production field. KKO has announced that one of the potential investors has proceeded to a decision to invest, having undertaken a successful due diligence and it is anticipated that a final agreement will be reached within this year.

Robust Capital Management and Balance Sheet

Following the capital raising a few months ago, KKO sits with a cash balance of $2.16 million as of the end of the September quarter. In FY2021, KKO ended the financial year with a loss after tax of $1.7 million. In FY2020, the loss was $1.8 million.

These numbers show a pattern and KKO has been extremely stable and prudent when it comes to managing cash burn. With a $2.16 million cash balance as of 30th September, we are confident that KKO has enough cash to take it through its milestones in FY22. We anticipate the next round of funding during Q4 FY2022 based on historical average cash burn. The balance sheet is therefore in good shape.

South Africa is energy starved and KKO seems to be the solution. Due to the location of the Afro Energy Amersfoort Project and granted Exploration Rights, this potential energy project sits amid multiple infrastructure resources that will facilitate commercialisation of the project. There are multiple monetisation channels for KKO. Virtual Networks, Independent Power Production, and Potential purchaser in major domestic offtake markets are the different channels on offer.

Diversified Commercialisation Channels

The Amersfoort Project is located at the heart of South Africa’s energy, mining, and transport infrastructure and close to the major population centres of Johannesburg and Tshwane (Pretoria). Consequently, commercialisation scenarios for Amersfoort gas are varied in both nature and scale. However, a common factor for all scenarios is a growing need for energy in all forms in South Africa.

There is now strong government support for gas as documented in the Integrated Resources Plan 2018. There is a current moratorium on granting of onshore gas exploration rights and a deepening energy crisis with limited capacity to increase gas imports into South Africa.

This situation gives Kinetiko and Afro Energy a clear advantage and reduces competition for potential gas supplies. Regulatory measures are attempting to diversify energy demand to overcome increasing shortages in particular sectors like electrical power.

Demands for all forms of energy are growing throughout sub Saharan Africa. The South African parastatal electrical generator and transmission company Eskom has in recent years been finding it increasingly difficult to meet peak demands of the countries that constitute the Southern African Power Pool, including South Africa.

Eskom not only faces considerable challenges in financing and building new generating and transmission capacity but has also had issues with supply of coal to its power stations. Energy input demand is further growing in the region for industrial usage, petrochemicals manufacturing, fertilizers, and transport fuels.

Potential commercialisation scenarios for Amersfoort include but are not limited to:

  • Gas sales into the existing coal powered generation plants for flame control and ultimately for full co-generation. The Majuba Power Station, a 4,110MW coal fired facility, is located within sight of the Amersfoort Project. Majuba requires around 50,000t of coal a day, which is currently transported by truck and railway from various sources in the East Transvaal coal fields. In addition to Majuba there are 10 additional power stations within 300km all utilising the existing high voltage power infrastructure
  • Gas supply into the existing gas transmission (Transnet’s Lilly pipeline) and distribution network in Durban.
  • Independent Power Production (IPP) either grid coupled or direct to a major customer such a local mine or manufacturing facility. Mini LNG interfaced IPP for peak load and distributed demand.
  • CNG production, distribution and transport networks already exist in South Africa. These virtual pipelines utilise rail and road to supply gas to manufacturing customers, fleet transport depots, mining and domestic end users. The operators of this capacity, (Whom we have relationships with) are able to obtain all necessary permitting from NERSA to transport CNG produced from our fields.

These channels offer KKO a diverse revenue stream and thus de-risks the investment. Thus, along with a substantial market, KKO comes with a healthy balance sheet, a good track record of hitting milestones and diverse commercialisation channels.

Technical Analysis

A picture containing chart Description automatically generated

Trend

KKO experienced a massive sell-off in early May 2013 after reaching its all-time high at 36 cents before heading down by more than 96% and finding its floor on the 29th of June 2015. KKO has been on a rollercoaster for quite some time now as shown by the formation of multi-year tops at 36 cents and more recently at 16.5 cents per share in November 2020.

Since early 2020, KKO rebounded tremendously and even attempted to break the 17 cents level, however without succeeding. The recent years’ ride was an incredible 12 baggers ride up to the recent peak at 16.5 cents before a correction back to the 50% retracement level. At the moment, KKO exhibits some short-term difficulties to hold its 50% retracement from the last swing high that occurred between early 2020 and Mid-Nov-2020. However, the price action appears to find relative support between the 50% retracement and the 61.8% Fibonacci level in the 8 – 11 cents per share. With a marginal increase in volume since the last 200 days, KKO remains relatively under selling pressure as attested by the descending trend line that limits KKO upside potential in the near term. On a positive note, the formation of a diversion between the RSI indicator and KKO’s price action may suggest an imminent trend reversal. This is also confirmed by KKO getting closer to the key level of 10 cents which may attract buyers who may be interested in building their long-term strategic positions.

Volume and momentum

Volume slightly increases since the last 200-day with the 20-day volume average up by 5.4%. The price action remains neutral in the near term, evolving in a range between 7.5 cents and 11 cents per share.

Trade consideration

  • Market participants might be interested to enter at a key support level of 10 cents per share.
  • Primary target price above 16.5 cents per share
  • Consider reducing exposure below 70 cents per share
  • It is recommended exiting the trade below 65 cents per share

Chart Description automatically generated

Recommendation

Kinetiko Energy is an Australian gas explorer focused on advanced shallow conventional gas and coal bed methane (CBM) opportunities in rapidly developing markets in Southern Africa. South Africa has extensive gassy coal basins, extensive energy infrastructure and a growing gas demand, making it an attractive area for investment. The Company has a large potential exploration area, of which approximately 7000 km2 is granted and being explored. KKO is a well-funded company with a healthy balance sheet and is optimally positioned to take advantage of the substantial energy demand that is present in South Africa. With multiple commercialisation channels, the future looks bright for KKO. We recommend a “Buy”.

 

Scroll to Top

Login

By submitting this form, I agree to the TERMS AND CONDITIONS and PRIVATE POLICY