Shale Gas - the Next Energy Revolution

Shale Gas - at this point in time, has not exploded into the main investment media. Yet those who are familiar are  already jumping in the bandwagon. In Australia, Coal Seam Gas investments have taken off substantially in the first decade of the 21st century. Rare earths has exploded in terms of investment at least between 2009 and 2010. It is both too late now for investors to make 1000% gain. However, Shale Gas is approaching the stage where it is almost starting to grab investors attention.

This article is an ongoing development. Details of the Shale Gas can be found elsewhere. This article is a collection of loose notes about potential investments in Shale Gas in Australia.


Updated 11 March 2013
Recent news of Chevron buying a huge stake in exploration land in the Cooper Basin.
Here are a few recent articles on Shale:

http://www.misa.net.au/__data/assets/pdf_file/0008/153359/204095-004.pdf

 

http://www.smh.com.au/business/miner-defends-fracking-in-the-cooper-basin-20130310-2fu0k.html

 

http://www.brisbanetimes.com.au/business/chevrons-bet-on-shale-down-under-makes-target-of-senex-20130307-2fo75.html

 

http://www.strikeenergy.com.au/our-assets/southern-cooper.html

 

http://www.proactiveinvestors.com.au/companies/news/32494/australian-shale-and-tight-gas-hits-milestone-as-norwest-energy-exoma-energy-increase-activity-32494.html

 

Some companies to note are

Senex SXY

Strike STX

Norwest NWE

DrillSearch DLS

Orica OGY

Beach BPT

Santos STO

Adelaide Energy board urges no action on Beach Energy bid
BY: TIM BOREHAM From: The Australian November 07, 2011 1:05PM

IN pitching a $73 million offer for its junior Cooper Basin partner this morning, Beach Energy is trumpeting its faith in the potential of the shale gas tenements in which Adelaide Energy has a 10-20 per cent interest.

Adelaide has been free-carried so far, but Beach chief Reg Nelson warned his more substantive outfit would turn off the funding tap, leaving Adelaide, which has $11m of cash, to pay its share of the expected $200m exploration bill with more capital raisings.



Hail shale gas, a force in the energy balance
by ROBIN BROMBY From: The Australian July 25, 2011 12:00AM

"SHALE gas, while now contributing to a gas glut in the US, may be looming as one of the most important developments in the world's energy geopolitical balance.
Gas supplies are a raw nerve issue in Europe, which remains concerned about its dependence on Russia, a nervousness exacerbated by the disruption of gas supplies from Libya earlier this year."


July 13, 2011

NEW STANDARD AND CONOCOPHILLIPS EXECUTE HEADS OF AGREEMENT
TO FARM INTO GOLDWYER PROJECT
(ASX: NSE)
New Standard Energy Ltd (New Standard) announces that it has entered into a non-binding Heads of
Agreement (Heads of Agreement) and exclusive negotiating period with ConocoPhillips Australia SH4
Pty Ltd (ConocoPhillips), an affiliate of global energy company ConocoPhillips [NYSE:COP].
The Heads of Agreement sets the framework  for ConocoPhillips to farm-in and jointly  explore, New
Standard’s flagship Goldwyer Project in the Canning Basin, Western Australia.



BHP buys Petrohawk Energy for $US12bn to boost shale gas exposure
ROBB M. STEWART  Dow Jones Newswires   July 15, 2011 10:11AM


Some Aussie firms position themselves as early movers in shale gas  
The Australian March 15, 2010

The article above lists the following companies with Shale Gas interests:
Beach Energy BPT
Sundance Energy SEA
AWE
New Standard Energy NSE
Molopo Energy


Future is hale and hearty for shale gas
Herald Sun February 23, 2011

More companies mentioned here with interest in Shale Gas:

BHP  paid $7.45 billion for US shale gas field

Santos STO

Beach Energy BPT

Lake Oil

Somerton Energy

AWE

Buru Energy 

Central Petroleum


Some more companies which are speculative and may have interest in Shale Gas:
Cooper Energy COE
Senex Energy SXY


Gas giant BG gets into Cooper Basin shale
Global gas giant the BG Group has joined up with local junior Drillsearch Energy to develop shale gas resources in Australia's Cooper Basin.


Analysis

The main areas with Shale Gas and potential companies with tenements appear to be:

Perth Basin - Iluka (ILU), Santos (STO), Origin (ORG), AWE, Norwest Energy (NWE)

Canning Basin - Oil Basin (OBL),  Buru Energy (BRU),

Maryborough Basin - Magellan Petroleum (MGN), Blue Energy (BUL)

Cooper Basin - DrillSearch(DSL), Inanmincka (INP), Linc Energy (LNC), Beach Energy(BPT), Adelaide Energy(ADE)

How to Profit from Black Swans or At Least Don't Lose Your Nest Egg

This blog article is inspired following my reading of the book called Black Swan (not the Ballet movie with Natalie Portman) written by Nassim Nicholas Taleb, mathematician, professor, philospher, writer, Wall Street options trader. The Black Swan book is more than interesting, it is intellectually fascinating and courageous as it takes on the established world of mathematical finance dominated by PhDs and turns it upside down. Technically, the author criticises and shows with detail why the Gaussian approximation, which is at the hearts of many derivatives pricing, can be so wrong because it fails badly when some rare event happens.

This blog article will leave the details of the book to the book itself. Instead from here on, I have developed some thoughts on how to make the most out of the markets based on having read the book. The suggestions here will be divided into 2 broad categories. The definition of Black Swan here are unexpected events which are almost inconceivable and have huge impact.

How to survive Black Swans
----------------------------
Some of the points here are along the strategy of diversification but there are subtle details relevant to black swan events.

- It has been said that to be save, invest in blue chips rather than speculative stocks. However, throughout history, most recently the GFC, blue chip companies with huge reputation and operating for more than half a century, have collapsed in a matter of days. Investors in such supposedly save companies are caught out much more severely than investors who invest a little amount in a certain speculative stock.

- There is no safe stock or even safe sector. By definition, a Black Swan happens when we least expect it and with the biggest impact. So diversify across stocks, sectors, or even classes of investment, say property or cash.

- Expect the worse to happen, then make decisions on the investments with such possibilities in mind. When we expect the worse or the unexpected, we take away the element of surprise and the event loses its sting. Furthermore, having expected the unexpected, the amount invested would incorporate risk measures, thus the amount of loss may be minimized. Examples:
    - expect the Australian currency to hit US$2.00 and asses what that would do to export companies.
    - expect some powerful nations to default and make appropriate plans.
    - expect commodity prices to go extreme in either way and see how it affects companies.
    - expect commodity prices to plummet and assess your investments in the mining companies.


How to profit from Black Swans
-------------------------------
Black swan events are not always there to cause damage. It is quite possible to make tons of money when exposed to a positive Black Swan. Here are some ideas:

- Expose yourself to investment opportunities that may present a positive Black Swan. This is not too different to what venture capitalist do. They invest in companies with totally new ideas and concepts, knowing that most will fail, but the one that succeeds will have an enormous return on investment.

- Speculative stocks are not necessarily Black Swans. One may first think that mining companies that can hit a jackpot is some big discovery or biotech company with potential ground breaking drug may be classified as Black Swan events. However, by definition the Black Swan being very rare and unexpected, mining and biotech companies cannot be true Black Swans because many investors expect them to have breakthroughs.

- An extraordinary event may still make a mining or biotech company a Black Swan type investments. Examples may include a mining company that has been in production for years and has almost no exploration program. Then suddenly that company happens to find a large mineral rich deposit on a very large scale. A biotech company may already have some drugs in the market and suddenly found that the same drug can be used to cure something totally different or unexpected.

- It is very hard to catch a positive Black Swan event due to its rarity in its class. However, in the overall sense, such as look at the entire sharemarket, there are enough Black Swans that occur that can be profitable. One of the key is that as the Black Swan event unfolds, not many will recognise it in the early stages, so those who paid attention enough may make a profit. One example in the resources sector is the advent of Coal Seam Gas CSG. Not that any CSG company are Black Swan itself but the entire CSG phenomenon is a Black Swan because before that, it simply did not exist. Then a few companies came into existence that tried to harvest this new resource and initially no one paid attention - this was the time to get in. When the majority of investors understand CSG, the early investors would have made a significant profit.



More ideas are most welcomed. Note that the investment ideas above are not from the author of the Black Swan book. Rather they are my ideas inspired after reading the book.

Coal Seam Gas companies

(taken from AOE's Acquisition Scheme Booklet)


Coal Seam Gas (CSG) has been of considerable interest over the last few years. It represents a new technology of producing gas. Over the recent years there has been various corporate takeovers of CSG explorer and developers (eg Sydney Gas, Sunshine Gas, Roma Petroleum) by bigger companies (eg BG Group, Shell, AGL).

The table below may serve as a quick guide as to what CSG companies are still available and hence possible investment opportunities. Note that currently, Arrow Energy has an acquisition offer. In terms of size by enterprise value, none of the remaining CSG are close to Arrow Energy.

Most of the remaining companies are explorer / developer. Only Molopo is producing gas from its field in the Bowen Basin in Queensland. Note that the largest field for Molopo is in Canada, hence the 2P and 3P numbers from overseas are not included here. It also has tenements in South Africa.

From the 2P and 3P resources we see that many of the explorers have quite small reserves. The only other company with significant reserves besides Arrow Energy and Molopo would be Eastern Star Gas.

Just a note that:
1P = proven
2P = proven and probable
3P = proven and probable and possible.

Hence those companies with a very high 3P and relatively small 2P means that the majority of the reserves are only "possible". These are the companies with higher risk compared to one with smaller percentage of Possible reserves. In table, in the Proven and Possible %, the lower percentage the better.

Lightning Analysis - ADE - Adelaide Energy

Lightning Analysis - Adelaide Energy

This is a very quick look at Adelaide Energy following a positive speculative news article recently.

http://www.news.com.au/adelaidenow/story/0,22606,25200329-913,00.html

http://www.theaustralian.news.com.au/story/0,25197,25444885-23634,00.html

Read those articles for yourselves - my impression from them is that ADE is a good speculative punt. However ......

I started looking at some fundamentals and technicals. Please note that this not meant to be a thorough analysis. But my quick calculations tells me that I would not be touching this stock no matter how good the news is until they get some more cash.

From their recent quarterly statement:
Revenue: $406K - first revenue after their purchase of Katnook Gas Plant from Origin.
Operational Cashflow: -$950K
Investment Cashflow : $1.083m
Cash at end of quarter: $409

Assuming the investment income is once off, and assuming revenue will be steady, if operational cashflow remains similar, say $900K, then ADE won't have enough cash to last the next quarter. At this point, I would stop all further analysis and wait at least to the next quarter results.



In terms of technical analysis, a simple Gann analysis would show that current price has almost reach the level of the last significant high at around 15c. Also that high point is about 11month to 1 year ago - another signficant time period in Gann analysis. This is a point to pause and see if it will break out of the resistance level and go higher.

In summary, although prospects of ADE sounds good, both fundamental and technical indicators suggest waiting before buying into it.