Coal Seam Gas Industry Consolidation Continues  

The coal seam gas sector continued to see plenty of action while I was on holidays. The Business Spectator has a look at the expansion ambitions of AGL and others - AGL moves into position

Trading halts for three companies this morning is a strong signal that the latest bout of consolidation of the coal seam gas sector is about to get underway. Unlike the flurry of large-scale activity throughout this year, however, this time the action is moving into NSW.

The securities of AGL, Sydney Gas and AJ Lucas Group were all placed in trading halts this morning: AGL’s and AJ Lucas’s because they are both involved in discussions concerning a "material transaction". Sydney Gas is in a trading halt "in relation to a takeover bid." AJ Lucas became Sydney Gas’s major shareholder, with about 20 per cent of its capital, this year.

As the joint venture partner of Sydney Gas in its Hunter Valley and Camden and Sydney projects, AGL already has its foot on the group’s key resources. Sydney Gas is potentially of real strategic consequence for AGL, the largest supplier of gas into Sydney and Newcastle.

There is an expectation of an increasing shortfall of gas for the Sydney market over the next decade that coal seam gas is expected to meet. With the more deeply explored and developed Queensland coal seam gas fields earmarked for the plethora of export LNG plants on the drawing boards, NSW gas will come into increasing focus.

Sydney Gas’s reserves and prospects are located close to the NSW electricity grid and the main gas transmission pipelines into Newcastle and Sydney. It already has long-term contracts to supply AGL. The joint venture partners have talked about an ambition of supplying up to 20 per cent of the existing NSW gas market by 2015 from its resources at Camden and the Hunter Valley and up to 50 per cent beyond 2015. ...

Sydney Gas wouldn’t be a major move for AGL. It has a market capitalisation of only about $110 million, although the spate of coal seam gas transactions – including Arrow Energy’s $551 million bid for Pure Energy this week – says that market prices aren’t much of a guide to takeover values in the sector. Arrow offered about $5.40 a share for Pure when the target’s shares had been trading at less than $1 only about six weeks ago.

In the current environment there is likely to be significant consolidation of the smaller and more weakly-funded players in coal seam gas as the Queensland LNG players look to secure the resources needed to under-pin two-train LNG projects and the bigger players move to pre-empt the likely positive (for producers) eventual impact of the LNG projects on domestic gas prices.

There are vast amounts of gas in the Sydney Basin so the prospect of rising gas prices and shortfalls in supply ought to see what has until now been a Queensland-focused land-grab spill into NSW.

There are some transmission constraints in supplying Queensland gas into NSW and there would be benefits for the sector in displacing Queensland gas contracted to NSW customers – freeing it up for the LNG plants – with local production.

AGL Energy has continued to shore up its NSW coal seam gas (CSG) reserves during the current economic downturn. ... AGL last week agreed to pay $370 million for AJ Lucas and Molopo Gas's CSG acreage in the Gloucester Basin, north of Newcastle. AGL says the Hunter exploration project, which it already holds half of, is the main prize and Sydney Gas's 50 per cent stake was worth $115 million, or two-thirds of the purchase price. By taking Camden and the Hunter project, AGL substantially boosts its ability to supply Sydney, Newcastle and Wollongong with gas.

Arrow Energy, Royal Dutch Shell's partner in coal-seam gas in northeast Australia, agreed to buy Pure Energy Resources for $673 million in cash and stock. ... "A combination of Arrow and Pure will drive further upside from Pure's acreage, and provide a commercialization path for Pure's reserves as a result of Arrow's downstream exposure through both Arrow's existing domestic power generation projects and proposed LNG export projects," Arrow Managing Director Nick Davies said in the statement.

Blue Energy Ltd. and Eastern Star Gas Ltd. led Australian coal-seam gas stocks higher in Sydney trading, boosted by two takeover bids in the industry last week that offered more than a 50 percent premium to the share prices. Perth-based Blue Energy jumped as much as 31 percent to 19 cents on the Australian Stock Exchange at 2:02 p.m. local time, while Sydney-based Eastern Star Gas gained as much as 22 percent. Rival coal-seam gas explorers Metgasco Ltd., Arrow Energy Ltd. and Bow Energy Ltd. also advanced.

THERE'S no gloom and doom on the western horizons with Toowoomba set to be insulated from the slump, courtesy of the mining activity, particularly in the Surat Basin. Bust is the last thing on Easternwell Group commercial general manager Marco Waanders' agenda. He said yesterday the major resource industry player was on track to double its workforce. He joined the chorus of Surat Basin insiders declaring the global economic downturn would not substantially hurt their projects.

This is despite mining giants Xstrata, Oz Minerals and Macarthur Coal announcing 500 job cuts on Tuesday and an expected downturn in Central Queensland coking coal projects. Mr Waanders was confident the family-owned company would create up to 600 new Toowoomba jobs within 18 months. “Everyone still needs gas to fire power stations,” Mr Waanders said from one of the company's five Garden City sites.

EDEN ENERGY, an ASX-listed minnow that suspended itself from trading because of a cash shortage, may have found a lifeline by selling most of its overseas coal-seam gas business. In a sign of the capital shortage facing small explorers, the energy company said it had entered into a conditional contract to sell 90 per cent of its share in licences to explore coal fields in Wales to lower its cashflow needs.

Grand Private Equities stockbroker Wesley Legrand said the ASX had been "ravaged and decimated" this year. He said mum and dad investors had been "taken to the cleaners by immoral, unethical and unregulated hedge fund short selling in combination with the greatest global margin call in history".

Of the few companies to gain ground in the past year, four of the top 10 are in the energy sector which has been propelled by takeover speculation and the blossoming coal seam gas sector. "In the short term, LNG and coal seam gas are hot property," Mr Legrand said. Linc Energy is number one, up 120 per cent, while Origin Energy has climbed 93.5 per cent.