Why We’ve Invested in Top End Energy (ASX: TEE)

Disclosure: S3 Consortium Pty Ltd (The Company) and Associated Entities own 3,725,000 TEE shares and 1,850,000 TEE options at the time of publishing this article. The Company has been engaged by TEE to share our commentary on the progress of our Investment in TEE over time.

If there is anything the markets have woken up to in 2022 it is the concept of energy security.

Amid the global rush to transition to cleaner sources of energy supply with lower carbon emissions, we have seen decades of underinvestment in “conventional energy” - oil and gas.

While the green transition is inevitable, it’s not just a simple switch of a button for everything to go green.

There needs to be an orderly transition. We think that is where gas as a form of energy fits in.

With the Russia/Ukraine war highlighting the EU’s dependence on gas imports, the whole concept of energy security has become a global talking point.

And it’s not just Europe — securing domestic gas supply is becoming increasingly important for all countries.

So we have two macro themes powering gas right now:

1. Energy supply security.
2. Gas as a transition fuel as the world moves to emission free energy sources.

The market is clearly recognising the upside to gas exploration right now.

Our 2020 Energy Pick of the Year, gas explorer Invictus Energy is trading at all time highs — up ~650% from our initial entry price.

Similarly to TEE, we invested in Invictus Energy long before the major drilling event and have been patiently holding whilst we wait for the company to firm up its drilling targets and drill them.

With TEE we have taken an almost identical approach, Investing early well ahead of the first drilling event which we don't expect to be ready for another 12-18 months.

Our latest Investment gives us early stage exposure to a (hopefully) large gas onshore discovery in Australia, and the country’s transition to a low carbon future:

Top End Energy (ASX:TEE), has ambitions to explore, discover and eventually supply gas — a critical transitional fuel source — to export markets and Australia’s energy hungry east coast.

TEE’s massive landholding of over 162,000km2 in the north of Australia gives it exposure to five key basins — the McArthur Basin, Wiso Basin, Georgina Basin, Murraba Basin, and the Amadeus Basin.

We are most interested in TEE’s McArthur Basin permits, adjacent to the Beetaloo sub-basin. It is here that some of Australia’s biggest gas players, including Origin, Santos, and Empire Energy are committing significant amounts of capital to large-scale exploration programs.

TEE has ~$5.7M in cash and a tiny market cap of ~$18.4M, giving it an enterprise value of just ~$12.7M. Considering just the size of the landholding alone, that is clearly a tiny EV.

A large chunk of TEE’s permits are still under application, so it still has to sort out access arrangements before getting stuck into any exploration work.

Whilst the permitting is being sorted out, we will monitor the actions of the bigger players in this region. Any new discoveries should add read through value to TEE’s acreage, before TEE has to do anything.

For one, global energy heavyweights Santos ($28 billion) and Origin Energy ($13 billion) are invested in the Beetaloo.

In 2022 alone, Origin will be drilling two separate wells whilst shooting more 2D seismic surveys across its projects, whilst Santos (Together with Tamboran energy) will be running two separate flow testing programs on wells drilled last year.

Aside from the giants, there are a few more ASX peers exploring the region capped at many multiples of TEE - which makes sense as their projects are more advanced.

The two we are keeping an eye on are:

• Empire Energy, which has a net (P50) prospective resource of 4.3 trillion cubic feet (Tcf) and is currently capped at $187M.
• Tamboran Resources which has a net (P50) prospective resource ~31 trillion cubic feet (Tcf) and is currently capped at $209M.

TEE doesn't have a Resource yet - but this is where we think the valuation upside lies.

Remember TEE is capped at just $18.4M, less than 1/10th of those two.

TEE completed its IPO on 4th April at 20c. It briefly traded as high as 44c before settling around 26.5c, its last closing price.

With its market cap of $18.4M, TEE trades with an enterprise value of just $12.7M, with ~$5.7M in cash in the bank.

As TEE matures its drilling targets and puts together (what we hope will be) a multi-Tcf resource over the next 12-18 months, we think TEE will be re-rated to a valuation comparable to that of its peers.

This, combined with the Top 20 shareholders holding ~60% of the shares on issue, leaves the company’s share price highly leveraged for a re-rate over the long term as it progresses through pre-drilling works, into drilling, and eventually into the resource definition phase.

We don't expect this to happen overnight. We Invested in TEE for the long term to see the valuation gap between its peers close as TEE progresses its projects and approaches the resource definition phase.

As reflected in the current valuation, there is still a fair bit of prep work and permitting work to do before TEE’s first big drilling event (likely to occur in 2023).

Regular readers will know that for the majority of our oil & gas Investments we like to Invest early, well ahead of the major drilling events at a low market cap.

We have been following this company for nine months, including helping to seed the project in its early stages. We are long term holders, and the vast majority of our seed round shares are escrowed for two years from the company’s IPO date this year.

Just as we did with Invictus Energy, we have Invested in TEE at what we consider a low market cap and expect that as the company completes its pre-drilling work, the market will take a greater interest and the share price will follow.

Our early stage Investment in TEE comes before 12-18 months of pre-drilling work ahead of major drilling events that we expect in 2023.

This is in line with our typical approach to investing in oil and gas exploration companies.

Long time readers will know that we have a very specific Investment strategy when it comes to investing in this sector.

1. We prefer to Invest early when quality acreage can be secured on good terms.
2. We will patiently hold our Investment as the company matures or nears a drilling event that could be a big catalyst for a re-rate.
3. We aim to Free Carry and Take Profit on our Initial Investment as the share price increases on the speculation of positive drilling results.
4. In the final stage we hope to at least achieve ‘Free Carry’ and hold the majority of our Investment into the drilling results - hoping the result will be positive.

With our Investment in TEE, we are employing the same oil and gas explorer Investment strategy that we used with:

• IVZ: we have waited nearly two years for drilling, and IVZ has now delivered a 600% gain in the lead up to the key drilling event this coming July.
• 88E: briefly traded at 1,000%+, settled at up ~500% for a while, but is now up ~120% after their second well delivered a disappointing result. This is why Free Carry and Take Profit is important.
• EXR: up over 300% since we first invested, but one that we now consider a later stage company that’s drilling to prove out a resource.

As for TEE, we are currently in stage 1 of our Investment plan. With a large chunk of its exploration licences still under application, we have Invested well before the company can do much work on the ground. We now wait patiently for the share price to hopefully rise as the company delivers its pre-drill milestones.

Once these key permits are granted we will look to move into stage 2 and 3 of our investment strategy. But, as we mentioned, we don't expect this to happen for at least 12 months.

We want to reiterate again that investing in stocks like TEE suits OUR investment strategy, but it might not be right for everyone. Seek professional advice before investing in small cap speculative stocks like TEE.

Given the early stage nature of the company there is still a lot that could go wrong, as detailed in our 2022 Investment Memo.

2022 TEE Investment Memo

Below we will run through our Investment thesis in TEE, providing for a shorter summary of why we Invested in TEE, what we want to see the company achieve in 2022, and our key objectives for the company to achieve this year. Check out our 2022 Investment Memo here.

We will be using this Investment Memo to track the progress of TEE throughout the year.

Why we invested in TEE

As noted above, we expect the next 12 months to be full of pre-drill work leading up to the major catalysts anticipated in 2023.

In the meantime, here is a quick summary that forms the basis of our 2022 Investment Memo:

Low enterprise value - leveraged to a discovery:

TEE is currently trading with a market cap of $18.4M, and has $5.7M in cash in the bank, giving it an enterprise value of ~$12.7M.

TEE is therefore highly leveraged to a major discovery being made over the coming years.

Beetaloo Basin gas peers trading at many multiples of TEE:

The region is currently being actively explored by the following ASX listed companies:

• Empire Energy, which has a net (P50) prospective resource of 4.3 trillion cubic feet (Tcf) and is currently capped at $188M.
• Tamboran Resources which has a net (P50) prospective resource ~31 trillion cubic feet (Tcf) and is currently capped at $202M.

Global energy heavyweights Santos (capped at $27 billion) and Origin Energy (capped at $13 billion) are also invested in the Beetaloo basin.

TEE is at a much earlier stage than its peers in the region as TEE does not yet have a prospective resource defined.

Yet we see potential for growth over the coming years. Over the next 12-18 months if TEE can firm up a drilling target with a large prospective resource, we would expect this to be reflected in its share price.

We want to eventually see TEE start to trade more in line with its peers and are ready to patiently wait.

Gas is the ideal transition fuel between fossil fuels and green energy:

Gas provides a pathway to transition from fossil fuels like oil and coal to cleaner, lower carbon emission renewable energy generation sources.

Currently, a switch from fossil fuels directly to renewables isn't yet possible. As a transitional fuel, gas can bridge the gap between fossil fuels and renewables, providing for a smooth shift without major disruptions in energy supply chains.

Mandated to acquire new projects:

TEE is mandated to explore acquisition opportunities ranging from helium, carbon capture assets, all the way through to hydrogen and ammonia projects. This gives TEE optionality to bring in new projects in a space where there is minimal ASX listed exposure.

What we want to see from TEE in 2022

As per our Investment Memo, we have set three key objectives for TEE for 2022. We will use these objectives to evaluate the performance of TEE throughout the year.

To see the key milestones we will be tracking for all of these key objectives check out our Investment Memo by clicking on the image below.

What are the risks?

Early stage exploration companies are unique in that they provide investors with an opportunity to get into a project on the ground level, but this only comes about because of the high-risk nature of the investment.

TEE is no different.

With the projects in the Northern Territory still under application and neither having a proven gas resource, these projects could be considered extremelyearly stage.

As we do with all of our Investments, we like to put together a list of some of the risks that we came up with respect to our investment in TEE:

What is our investment plan?

We will be closely following the progress of TEE as it progresses towards its initial drilling campaign in 2023.