Natural gas and the clean energy transition
Published 07-MAY-2022 08:46 A.M.
15 minute read
It was another rough week on the markets (the US markets did bounce back at the end of last night's session so hopefully a better week is coming).
But we’re in it for the long haul — we Invest in a variety of sectors and themes that we think will broadly do well over the next 10 years.
Across our Portfolios we hold a mix of early stage tech, biotech, resource exploration and development companies.
We are currently overweight in critical materials exploration companies - those that are finding and developing deposits of the commodities used to manufacture all the things the world needs to move to a zero carbon economy.
Think lithium, cobalt, graphite, copper, nickel, alumina, manganese, rare earths, helium, green hydrogen and uranium.
But a full transition to green energy is going to take a decade.
Replacing all the petrol cars in the world with electric cars, building charging infrastructure, building large scale wind and solar plants or nuclear for energy doesn’t happen overnight, or even in a couple of years.
And the world needs a stop-gap solution to provide energy security while the green transition unfolds.
Natural gas has long been considered a “transition fuel” from hydrocarbons to renewables.
Natural gas prices have surged in the last few months after sanctions placed on Russia (the major gas supplier to Europe) took a huge chunk of supply off the market. And we don’t think the Russia situation is going to stabilise any time soon.
Here are the recent headlines:
Rather than see gas dependent countries start burning more coal for their energy as gas prices surge, a better and cleaner solution is to bring more gas supply onto the market, in the near term, in friendly countries.
Given existing gas infrastructure, energy from gas can come online a lot quicker than renewable energy or nuclear - making gas a preferred stop gap.
We think this thematic will play out over the next three to five years, before renewables start coming online in a significant way.
We have recently added some early stage gas explorers to our portfolio, that we hope can bring some new supply online to support the global shortfall (by hopefully making a discovery and being acquired by a large development partner).
We’ve Invested in three new gas exploration companies in just the last three weeks - TEE, PRM and GLV.
This is in addition to our long held positions in IVZ and EXR.
There are three reasons for why we increased our exposure to gas:
- Gas is immensely important right now
- Gas will be important well into the future
- Gas is a necessary component of the clean energy transition
The first two relate to two different timeframes for realising returns on our Investments. Meaning we think gas is both immediately valuable and it is in for a sustained period of demand.
Today we’ll explain why we’ve made these three new Investments.
We will go further into the macro gas situation below, but first here’ a quick look at our three latest gas Investments (and a short summary on our two longer held Investments):
Remember that early stage gas exploration is very risky, share prices can go up OR down significantly on drilling results - especially down if a gas exploration well doesn’t deliver a positive outcome.
Top End Energy (ASX:TEE)
Yesterday we announced a new addition to our Next Investors Portfolio: TEE
TEE has ambitions to explore, discover and eventually supply gas 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, Tamboran Resources and Empire Energy are committing significant amounts of capital to large-scale exploration programs.
TEE doesn't yet have a Resource - but this is where we think the valuation upside lies.
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.
As TEE matures its drilling targets and can put 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.
TEE has ~$5.7M in cash and a tiny market cap of ~$18.4M (trading at less than 1/10th of peers Tamboran Resources and Empire Energy), giving it an enterprise value of just ~$12.7M.
Click here to view our 2022 TEE Investment Memo where you can find a list of the key objectives we want to see our TEE achieve this year, the key reasons we invested in TEE, and the key risks to our Investment thesis.
In our Catalyst Hunter Portfolio, our investments PRM & GLV share a 37.5% interest in the Sasanof Gas Prospect (PRM holds 12.5% interest and GLV a 25%).
The prospect they will be drilling sits on the North West Shelf, offshore WA, home to the biggest ever gas project developed in Australian history - the Greater Gorgon Project owned by a joint venture between supermajors Chevron, Exxonmobil and Shell.
The Greater Gorgon Project features the Jo-Jansz discovery which has a resource of 22 Tcf and the Gorgon discovery which has a 16 Tcf resource.
To contrast, PRM and GLV’s Sasanof Prospect has a prospective Resource as follows:
- 17.8 Tcf and 449 million barrels of condensate on a 3U basis (high case)AND
- 7.2 Tcf and 176 million barrels of condensate on a 2U basis (mid case).
Drilling is expected to take place on 24 May 2022.
Click here to view our 2022 PRM & GLV Investment Memo where you can find a list of the key objectives we want to see our Investments achieve this year, the key reasons we continue to hold PRM/GLV and the key risks to our Investment thesis.
We also have two long held gas names in our Next Investors Portfolio:
Invictus Energy (ASX:IVZ)
IVZ is just two months away from drilling the largest seismically defined, undrilled oil and gas structure in onshore Africa, Zimbabwe (we have been waiting nearly two years for this to be drilled).
IVZ's oil & gas project in Zimbabwe has a prospective resource of 9.25 tcf Gas + 294 million barrels of Conventional Gas-Condensate (100% gross basis).
Considered an “Elephant scale” target, a successful discovery in this part of Africa has “basin opening” potential.
“Opening a basin” means successfully discovering a large new oil and gas system. It would be a big achievement for a small cap energy explorer like IVZ and could be a genuine company making event.
Click here to view our 2022 IVZ Investment Memo where you can find a list of the key objectives we want to see achieved this year, the key reasons we continue to hold IVZ, and the risks involved.
Elixir Energy (ASX:EXR)
EXR, which was our 2019 Energy Pick of the Year, is looking to build out a clean-energy producing hub consisting of Coal Seam Gas and Green Hydrogen in southern Mongolia, bordering China.
We have been Invested in EXR for almost three years now and are looking forward to the company’s long term pilot production program at its coal seam gas project.
EXR’s two-well extended pilot production program is scheduled to commence mid-year. In the ~6 month program, EXR will be trying to affirm commercial gas flows that can underpin a planned gas fired generation project over EXR’s project area.
This is a major step in converting its gas resource into a producing economic project.
Concurrently, EXR is also in the middle of its 2022 exploration drilling program where it has already made a new sub-basin discovery.
We are also watching with interest as EXR makes progress on its Green Hydrogen project in Mongolia.
EXR released an update to the ASX yesterday regarding its current exploration program. We covered this in a Quick Take here - Multiple rigs drilling now.
Click here to view our 2022 EXR Investment Memo where you can find a list of the key objectives we want to see our Investments achieve this year, the key reasons we continue to hold EXR and the key risks to our Investment thesis.
The natural gas macro theme: why gas is important right now...
There’s an old saying amongst traders which goes, “If it's in the news it’s in the price”.
And as we saw earlier, the headlines are everywhere:
And this is what the benchmark EU gas price looks like right now:
But this isn’t just about Europe. The ruptures caused by Russia’s war on Ukraine are quickly bleeding into the US.
This is the benchmark US natural gas price:
Prices are getting so high that it's causing demand destruction, which basically means that a good or service becomes so expensive that demand falls because buyers simply can’t afford it.
This demand destruction had the International Energy Agency once forecasting modest growth of 1% globally, expecting natural gas consumption to fall by ~6% this year in Europe and in Asia, and grow by just 3% in 2022 as compared to 7% in 2021.
Gas will be important well into the future...
As investors, when we think about demand destruction, the knee jerk reaction is to think about recessions and the possibility that gas will price itself out of a future.
However, we don’t think that will be the case:
The demand/supply imbalance will naturally be addressed. This happens when prices go up quickly, capital is deployed to bring more supply online, and prices normalise.
Which is hopefully where our gas exploration Investments will come into play if one of them can make a discovery.
Goldman Sachs has tipped US$139B in natural gas capital expenditure over the next five years:
We expect the gas shortage thematic to last three to five years and believe existing major gas producers will be on the hunt to acquire new proven gas fields.
We have positioned our portfolio to have exposure to potential gas discoveries that could fill this need.
Our Gas Portfolio:
🗣️ Quick Takes
Here are this week's Quick Takes:
📰 This week on Next Investors
⚠️NEW INVESTMENT ALERT⚠️
Why We’ve Invested in Top End Energy (ASX:TEE)
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.
Our latest investment in the Next Investors portfolio is Top End Energy (ASX:TEE)
Of TEE’s massive NT landholding, we are most interested in its 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.
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.
We invested in TEE in its early stages and it has 12-18 months of pre-drilling work ahead of it before major drilling events that we expect to see in 2023.
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 could be re-rated to a valuation comparable to that of its peers.
With ~$5.7M in cash and a tiny market cap of ~$18.4M (trading at less than 1/10th of both Tamboran Resources and Empire Energy), TEE has an enterprise value of just ~$12.7M.
Considering just the size of the landholding alone, that is clearly a tiny EV.
📰 Read the full breakdown: Why We’ve Invested in Top End Energy (ASX: TEE)
GAL hits sulphides, assays pending, what’s to the east?
On Wednesday, our long term exploration investment Galileo Mining (ASX:GAL) delivered promising preliminary results from its recent nickel-copper-palladium RC drilling campaign.
After running its drilling program across two high priority target areas, GAL intersected disseminated copper and nickel sulphides across all six RC drillholes at its “Mine Lease'' prospect.
These drill targets were around the previously discovered sulphide intercepts made just beneath the already established 25.1mt cobalt/nickel resource at the “Mt Thirsty prospect” - since re-named as the “Mine Lease” Prospect.
We suspect that the change in name comes from the fact that this prospect sits over GAL’s only current mining lease at its Norseman Project.
The advantages of this being that in the event a successful discovery, GAL can move the deposit straight into production, skipping the years of the regulatory approval work required to get to ‘mining lease’ status.
Having now drilled six holes for a total of ~ 1,142m of drilling, GAL has confirmed that the sulphide structure extends along strike and there are indications that the structure is getting larger.
GAL has effectively proven that the sulphide structure does in fact extend along strike to the east.
All that is left now is for GAL to prove the second part of its theory that grades are also improving as the structure gets bigger to the east.
📰 Read the full breakdown: GAL hits sulphides, assays pending, what’s to the east?
In our other portfolios 🧬 🦉 🏹
EV1 Firms up first offtake deal, sets sights on European downstream manufacturing
On Monday our Wise Owl 2021 Pick of the Year, Evolution Energy Minerals (ASX:EV1), took a step towards securing an offtake agreement AND a downstream value-add partnership to produce high value graphite products.
EV1 signed a MoU with a downstream graphite product specialist — a prelude to a ‘binding offtake agreement’ that’s expected to be finalised in the coming weeks, of which key terms are already agreed.
EV1’s MoU is with the global leader in the manufacture of expandable graphite and associated high-value graphite products – Yichang Xincheng Graphite Co Ltd (YXGC).
The MoU covers two key parts for EV1:
- Key terms for a binding offtake agreement:
- YXGC to buy 30,000 tonnes of EV1’s planned coarse flake graphite production over 3 years.
- This represents 56% of EV1’s planned graphite production and over 70% of concentrate revenue for the first three years.
- Intention to form a joint venture on a downstream manufacturing facility in Europe:
- Both parties will explore the feasibility, construction and operation of this facility
- EV1’s graphite to be used, and YXGC’s technology.
- Production of expandable graphite, graphite foil, and other high-value graphite products.
We think that the future for exploration companies — with well defined deposits — is to go further up the value add chain by establishing a downstream strategy.
The market seems to agree with this, valuing companies with downstream operations significantly higher than those simply focused on mining, for context ASX listed graphite explorers Magnis Energy Technologies for example has a $435M market cap and EcoGraf has a market cap of $221M, mostly because of the advanced downstream strategies.
With the news earlier this week, EV1 has taken the first step towards showing the market where it will build out its downstream strategy and what it hopes to focus on going forward.
📰 Read the full breakdown: EV1 Firms up first offtake deal, sets sights on European downstream manufacturing
🏹 Catalyst Hunter
PRM & GLV’s Drilling Equipment has been mobilised - Just a Few Weeks til Drilling Begins
On Thursday, our oil and gas exploration investments Prominence Energy (ASX:PRM) and Global Oil and Gas (ASX:GLV) announced an updated timeline for the mobilisation of its drill rig in the lead up to the commencement of drilling at the Sasanof Prospect.
PRM and GLV both confirmed that mobilisation had commenced with the rig scheduled to begin moving to the well site on the 16th of May, ahead of the spudding of the well which is now scheduled for 24 May.
The Sasanof Prospect sits on the North West Shelf, offshore WA, home to the biggest ever gas project developed in Australian history - the Greater Gorgon Project owned by a joint venture between supermajors Chevron, Exxonmobil and Shell.
The Greater Gorgon Project (readers in Western Australia will know this one) features the Jo-Jansz discovery which has a resource of 22 Tcf and the Gorgon discovery which has a 16 Tcf resource.
In contract, PRM and GLV’s Sasanof Prospect has a prospective Resource as follows:
- 17.8 Tcf and 449 million barrels of condensate on a 3U basis (high case)AND
- 7.2 Tcf and 176 million barrels of condensate on a 2U basis (mid case).
Regular readers will know that we generally like to invest years before an oil and gas drilling event, with PRM and GLV we have taken a different approach and have made our Investment a few months before drilling.
As a result, in this weeks note we touched on all of the key risks that have already been addressed including, permitting risk ✅, funding risk ✅, environmental risk✅, technical risk ✅
We also touched on the most important risk which is still relevant to the upcoming drilling program - Exploration risk.
📰 Read the full breakdown: PRM & GLV’s Drilling Equipment has been mobilised - Just a Few Weeks til Drilling Begins
Have a great weekend,
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