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Comet Ridge

ASX :

COI

Market Cap : $116.11 Million

52 Week Range : $0.055 - $0.150

Share Price : $0.135

Buy

An energy company developing its projects swiftly and has the potential to meet domestic and international demand. A "Buy" from us.

Company Analysis

Comet Ridge (ASX: COI) has significant Coal Seam Gas (CSG) projects in key regions of Queensland and northern New South Wales. Gas resources have been certified, by independent professional certifiers, at three projects and gas reserves have recently been certified at the Mahalo project in Queensland.

Comet has gained early entry into well-located exploration areas, allowing shareholders to gain substantial leverage into the upside value potential associated with tremendous exploration success. The company has conducted CSG exploration and appraisal, intending to mature exploration acreage from Gas Resources into Proven and Probable Gas Reserves. Comet primary activities are to initially involve drilling wells to certify Prospective and Contingent Resources and then through further appraisal via Pilot Projects to progress into certified Reserves.

What we have seen so far is that Comet is taking high equity positions in its large exploration permits, including a 100% interest in two blocks in the Galilee Basin and the mining permit in the South Island of New Zealand. Comet Ridge has 40% equity in the ATP 337P Mahalo Block in the Bowen Basin, and CSG equity of 22.5%, 50% and 60% respectively in PEL 6, PEL 427 and PEL 428 in the Gunnedah Basin located in central New South Wales.

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Comet has highly prospective, large footprint gas assets in three basins in eastern Australia

“Mahalo Gas Project” in the Southern Bowen Basin in Queensland: This site comprises the significantly appraised Mahalo Gas Project, and three recently awarded 100% blocks to the north. This area is collectively referred to by Comet as the Mahalo Gas Hub. What is excellent about this area is that it is close to infrastructure and the Gladstone LNG market. This site is being targeted by Comet for near-term production, using a modular development model from the nearby Santos-operated Arcadia coal seam gas field.

During FY21, Comet and its Joint Venture partners invested significant time and effort into preparing to take the Mahalo Gas Project forward. This led to the firm announcing, after FY21 year-end, the acquisition of APLNG’s 30% interest in the Project. At the same time, Comet Ridge executed a funding and option agreement with its Mahalo Gas Project partner, Santos Limited. The key terms of this acquisition and the Santos agreements consist of cash consideration of $12 million payable to APLNG after the acquisition and $8 million post-completion payment in the deferred tranche. Furthermore, Comet will have access to $31.15 million of debt funding from Santos to fully fund the upfront acquisition consideration which is due later by the end of CY21.

Overall, the $20 million acquisition will take the company’s stake in the project up to 70%, increasing its share of the current proved and probable reserves of 266 petajoules within the production licences. Mahalo is a well-defined field with existing reserves and demonstrated ability to produce gas at commercial rates with the Mira-6 short lateral pilot producing 1.4 million standard cubic feet during testing. It is fully licensed for production and features target coal seams at shallow depths ranging from 180 metres to 400 metres. Moreover, Mahalo coals produce very low amounts of water, which are expected to lower both capital and operating expenditure, and high-quality gas with almost no carbon dioxide. The project is also close to the Santos-operated Arcadia and Fairview projects with cost and time savings able to be achieved by developing the Mahalo Gas Hub area using the same modular design as Arcadia. More importantly, with Australia’s east coast continuing to struggle with high gas prices due to high demand, the timing certainly seems right for the development of this project that could meet both domestic and international requirements.

  1. The Galilee Basin in Queensland: This site represents three permits that cover a large area in the eastern part of the basin and are prospective for both coal seam gas and conventional gas or deeps.
  2. The Gunnedah Basin in NSW: and finally, the third project of Comet is the two large permits located in the northern part of the basin that is prospective for both coal seam gas and conventional gas as well.

Source: COI

Coal Seam Gas, the main source of energy across the world

Coal Seam Gas (CSG) is now one of the main sources of energy across the world. Coal bed methane and the gas that can be generated from it has been found in many nations including the United States, China, Russia, and the Middle East. One of the most important sources of CSG is shale formations which are found in these countries and in Australia.

One of the polemics around CSG is the process to extract this resource which is somehow not that environmentally friendly. The CSG is accessed through a process named “fracking”. The method involved in the extraction of coal seam gas is made possible with hydraulic fracturing. It goes without saying that It is one of the most contentious aspects. It is a complex procedure, “fracking” involves the use of water, sand, and small amounts of chemicals, injected into the coal seams under high pressure. This cracks or fractures the seams for distances of up to 30 metres and allows the gas to escape and be recovered. Key environmental management concerns associated with “fracking” relate to the recovery of water and salts. This highly saline water contains a variety of chemicals and minerals. Volumes of up to 100 kilolitres of such water can be generated each day in a typical CSG extraction process. A CSG operation might also take place for around ten years. This process risks groundwater quality and increased salinity of water resources. The use of above-ground storage tanks for wastewater is a short-term solution.

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. Yet the risk to some of Australia’s best farming land continues to be a legitimate concern. However, one important question may arise and that is:

Why is Australia putting so much importance on ramping up the production of CSG?

One of the key reasons why CSG is playing an important role is due to the “gas supply crisis” on the east coast of Australia. This happened even though there are an estimated 48,800 petajoules of known or proven CSG reserves in Australia’s east coast. Domestic demand for this gas from households and industry is estimated to be just over 700 petajoules annually. This is less than 1.5% of proven or potential resources. In the past five years, a handful of multinational CSG developers have been granted licences to explore, extract and export around 2,100 petajoules of gas from the Australian east coast. These licences were issued on the understanding that the development of CSG would be both effective and efficient. Further, it was not meant to have any negative impact on the supply of gas to local consumers. Yet these developers have not succeeded in meeting their original production targets. These firms are now exporting the bulk of CSG to international buyers due to the high prices found in international markets. This has pushed up the overall cost of gas to Australian industry and made it difficult for local manufacturing companies to secure long term gas supply contracts.

A major driver for the growth in CSG was a decision in 2000 by the Queensland Government that required 13% of all power supplied to the state electricity grid to be generated by gas by 2005. That requirement has been increased to 15% by 2010 and 18% by 2020.

Comet exhibits solid progress despite being affected by the COVID-19

Despite how COVID-19 has disrupted many businesses during the period, Comet has managed well and is on schedule for an imminent move from exploration to production. FY21 was an eventful year for the company, here is what happened:

APLNG’s 30% acquisition: One of the most important progress that set the company for an imminent production is the transformative acquisition of APLNG’s 30% interest in the Mahalo Gas Project which was announced on the 3rd of August 2021. This takes Comet Ridge’s interest to 70%, adding significant increases to 2P and 3P Reserves with furthermore, Contingent Resources to be developed for the near-term supply into the strengthening east coast gas market.

Joint Venture partnership: funding for acquisition provided by continuing Mahalo JV partner, Santos Ltd (ASX: STO) in exchange for options to increase STO’s equity to 50% in the Mahalo Gas Project and to acquire a 50% interest in Comet Ridge’s 100% Mahalo North (ATP 2048) and Mahalo East (ATP 2061) assets.

$10 million loans for the development of the Mahalo Gas Hub: Comet agreed for a $10 million loan facility with Pure Asset Management to support the Company’s Mahalo Gas Hub project development strategy, with Tranche 1 drawn of $6.5 million completed on the 17th of September 2021.

Comet completed a $5 million placement: Announced recently last month, the company has completed a $5 million placement with more than 64.4 million new shares issued at 8.25 cents apiece. Comet will use this capital to begin an appraisal programme at the Mahalo North project.

With the recent progress, we are confident that Comet has reached an inflexion point where we can now fast-track its final appraisal, which will lead to the completion of the development of the Mahalo project. The swift development of the company has been well-reflected in the market, with Comet’s shares trading at 12.5 cents, which is an impressive appreciation of 73.6% year to date.

FY22 onward outlook: Comet is preparing the essential foundation to move into production

The recent acquisition of APLNG’s 30% interest is a key milestone for Comet. This now points the company towards a very exciting future. We are expecting Comet to prepare to drill its first development-style long dual lateral well in Mahalo North which Comet plans to spud by October along with production tests through the remainder of CY21 and into CY22. The Company has been recapitalised through a $10 million corporate facility with the first $6.5 million tranches drawn by the end of FY21. Comet also recently conducted a small and targeted equity raising to bring some high-quality institutional investors onto its register. Subsequently, the company now has over $15 million in available cash reserves and facilities.

Comet also recently provided CleanCo with a notice to commence gas sales negotiations following the agreement executed by both parties from back in 2019. The firm has full rights to market and sells its equity share of production from the Mahalo Gas Project and its 100% owned Mahalo North, East and the Far East blocks.

“Fossil fuel”, that cheap and abundant energy that has provided prosperity, a high standard of living and longevity to billions of people around the world for centuries, now seems to have become a term that is ideologically maligned and for some investors, to be avoided. Although, this has all happened very quickly. The irony is that many of us do not even realise how inextricably our lives are intertwined with fossil fuels. We assume that renewable energy will displace natural gas quickly, but nothing could be further from the truth.

In our opinion, natural gas will continue to play a key role in support of renewable energy for decades. Hence, the long-term forecasts on renewable penetration rely on natural gas as an important source of transitional supply of energy. In addition, natural gas, the lowest carbon density fossil fuel, is, by the way, more heavily utilised in manufacturing, home heating and cooking, than in power generation. More than 70% of the natural gas used in Australia is for the manufacture of many of the products that we use day to day such as plastics, fertilisers, glass, bricks, and clothing fibres, just to name a few. And then there is Liquified Natural Gas (LNG) that is produced here in Australia and exported to mostly Asian countries. Australian LNG is cleaning up the air in a few international cities and providing an energy source that can start up at the push of a button, at any time of the day or night, and in any weather conditions.

Comet is a natural gas appraisal and development Company, soon to move into production. We expect the company in the near term to focus on the supply of the ever-increasing energy requirements of Australia’s east coast and support the LNG export industry, by progressing its large Mahalo Gas Hub through the final stages of appraisal and into production.

According to several gas market forecasts, strong demand for natural gas will continue into Australia’s eastern seaboard, and for LNG into Asia. This demand will run for decades, and we believe Comet can provide competitively priced gas into this market opportunity.

Robust balance sheet despite aggressive capital allocations

In a nutshell, Comet Ridge has received in FY21 Research and Development incentives totalling $3.25 million. As of the end of the financial year, the company held a cash balance of $3.39 million. In terms of operating expenses, Comet made some improvements vis-à-vis the previous period and reported an underlying loss after tax of $6.96 million compared to $10.39 million during FY20.

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Source: COI

Comet has been quite aggressive in its capital allocation. This shows the firm intention to move rapidly from exploration to production. At this pace, we expect the first step to production from its Mahalo Gas Project to be set for FY23. We expect the company to continue to adopt an aggressive cash deployment to accelerate its project development. We forecast an expense to cash ratio at an average of 96.74% from FY22 to FY24, quite high, but manageable. This should allow Comet to lay the groundwork for the production onward FY23. Despite being so far cash-intensive, Comet’s balance sheet remains solid with only 16.9% of liabilities out of 50% of assets of its capital structure mix. We anticipate the company’s assets to continue to expand at a reasonable CAGR of 4.28% for the next three years and reach $86.45 million by FY24.

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Recommendation

Comet Ridge has achieved a major milestone during FY21. Comet and its Joint Venture partners invested significant time and effort into preparing to take the Mahalo Gas Project forward. This led to the firm announcing, after FY21 year-end, the acquisition of APLNG’s 30% interest in the Project. At the same time, Comet executed a funding and option agreement with Mahalo Gas Project partner, Santos Limited. It is worth noting that this $20 million acquisition will take the company’s stake in the project up to 70%, increasing its share of the current proved and probable reserves of 266 petajoules within the production licences. Mahalo is a well-defined field with existing reserves and demonstrated ability to produce gas at commercial rates. It is fully licensed for production. The project is also close to the Santos-operated Arcadia and Fairview projects with cost and time savings able to be achieved by developing the Mahalo Gas Hub area using the same modular design as Arcadia.

With the recent progress, we are confident that Comet has reached an inflexion point where we can now fast-track its final appraisal, which will lead to the completion of the development of the Mahalo project. The swift development of the company has been well-reflected in the market, with Comet’s shares trading at $0.125, which is an impressive appreciation of 73.6% year to date.

As Australia’s east coast continues to struggle with high gas prices due to high demand, the timing certainly seems right for the development of this project that could meet both domestic and international requirements. Considering all these aspects, we recommend a “Buy” for this future CSG producer.

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