Sector Watch 070111 - CSG and Wine

Coal Seam Gas (CSG)
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What is it?
- is a natural gas formed as a by-product during the coalification process whereby organic matter is turned into coal.
- Coal seam gas (CSG) is usually methane in composition and is typically attached to the coal along its natural fractures and cleats. This gas is released when pressure on the coal seam is reduced, usually after water is removed from the seam.
(http://www.nrw.qld.gov.au/mines/petroleum_gas/csg/index.html)

Which Companies ?
QGC - Queensland Gas Co
AOE - Arrow Energy
SHG - Sunshine Gas
WCL - Westside Corporation

Performance? I started watching CSG 2 years ago, when the industry is still in its infancy. Even now, in terms of production, CSG is still a new source of gas, breaking into the market. However, recently it has attracted wider attention. I followed QGC and AOE when they were 40c and 30c respectively. These days they are trading at 1.35 and 1.20 - a return of 300% to 400% if an investment was made 2 years ago. Look at QGC and AOE amount of probable reserves - this may be an indicator to compare with other newer CSG companies.

QGC was recently pursued by Santos but made a deal with AGL instead. The pursuit by Santos has pushed QGC from 90c to $1.44. Interest generated by the takeover potential has also boosted AOE from 60C to 1.20. Currently QGC and AOE may have premium included in their prices.

Recommendation: QGC Hold, AOE Hold

SHG has potential and is not purely a CSG company - diversification may be its advantage here. It has not grown too much yet so there may still be value. WCL is just listed an operates on farmed out property from SHG. The farming out process may be in favour for SHG because it mitigates exploration and operational risks. If WCL is successful, SHG benefits without significant operational cost.

Detailed analysis on SHG is not done yet but is encouraged to compare its probable / proven reserves with QGC and AOE.

Recommendation: SHG Buy at 33c, Target 60c by 2008.


Wine Glut
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The wine glut caused by over-planting / harvest of grapes may have led to significant drop in wine prices and hence winery stocks recently. However there are a few positives about this wine glut to note:
- so far the grape harvest does not seem to be affected by the severe drought in Aust.
- low cost wine means it is available to a broader consumer base. When the price picks up (and it will) it may benefit from a bigger market.
- as the grape planting reduces - due to drought or farmers leaving the sector (poor performance recently) - the price of wine will pick up.
- in the present low priced environment, Aust wine is expanding its export market with significant growth to China (rising middle class) and also to the US (which may overtake Britain as our export destination). (Src: http://www.news.com.au/business/story/0,23636,21029613-462,00.html)

Watch: CWT