Sam Wahab heads up oil and gas equity research at the London-based investment firm Seymour Pierce. His coverage includes gas companies with global operations on multiple stock exchanges. Sam’s career began at PricewaterhouseCoopers, where he qualified as a prize-winning chartered accountant. At PwC he was primarily focused on his role on the company’s energy team, specializing in assurance and transaction advisory, with clients including Royal Dutch Shell and JKX Oil & Gas. Following a spell on the oil and gas research team at Arbuthnot Securities, Sam joined Seymour Pierce in 2011.
Gas Investing News (GIN): CBM Asia (TSXV:TCF) is working on identifying and acquiring high-quality coalbed methane (CBM) targets in Indonesia. Can you give our readers an overview of Indonesia’s unconventional gas market and how is CBM Asia benefitting from its investment in the region?
Sam Wahab (SW): Well Indonesia has one of the largest CBM resources in the world with a potential 453 tcf in-place. CBM exploration in the country is relatively recent, beginning in 2009 with first commercialization in 2011 with CBM to LNG exports.
In terms of the country’s natural gas market, this is largely characterized by declining conventional gas supply and rapidly growing domestic market with a large export segment – it’s actually the largest in Asia. So their natural gas market is relatively low, whilst domestic consumption is rapidly increasing alongside their large export segment. Domestic consumption has risen over 100 percent in the ten years to 2010; which is largely a function of Indonesia’s robust economic growth reaching $1 trillion GDP in 2012, whilst still having a low per capita consumption level. In 2010, 50 percent of Indonesia’s gas was exported mostly to North Asian markets in the form of LNG, a level that fell from 62 percent the previous 10 years
The upshot of this for CBM Asia is that a clear margin exists whereby domestic gas prices range from $5.00-$11.00/mcf whereas export prices are as high as $15.00/mcf in some areas. This combined with the relatively low capital requirements ($2.5-3.0 million to acquire a PSC, plus $4-6 million to complete the first exploration phase) creates a situation of low risk and low cost with the potential for high returns.
GIN: CBM Asia’s strategy seems to be to acquire, de-risk and sell prospective natural gas properties. Last year CBM drilled 6 wells. Can you speak to the benefits of this approach rather than acquiring and taking projects through to production?
SW: Their strategy is to de-risk their assets to approximately 80 percent certainty by drilling low cost wells and pilot production projects to reach early stage production and cash flow. At this stage the company will then seek to sell to a major oil company to capture the valuation upside from this de-risking process.
In particular, CBM Asia looks towards past developments within Australia’s CBM industry where small independent operators proved up the resource and were then acquired as part of an industry consolidation. From 2003 to 2011 Australia’s CBM industry was consolidated through 33 mergers with a value of over A$30 billion. In our view, a similar consolidation could occur in Indonesia as many of the acquirers of Australian CBM assets (Total, Santos, Kogas) and other oil majors (ExxonMobil, Eni, BP) have already made investments into Indonesia’s CBM industry.
GIN: In December CBM Asia and ExxonMobil (NYSE:XOM) signed a farm-in joint venture for the Barito and Kutai basins in Indonesia. What is the significance of a partnership between ExxonMobil and CBM?
SW: Yes, it truly was a significant transaction for the company. CBM Asia has signed a farm-in joint venture deal with Exxon which will see the company acquire 35 -37.5 percent participating interests in four CBM PSCs in the Barito Basin, as well as maintain the right to farm-in into future CBM PSCs Exxon may acquire in the Kutai Basin. In the short term, it allows the two companies to combine technical and financial strength, with efficient operations to effectively develop these particular opportunities.
In terms of the Barito basin PSC farm-ins and the potential Kutai basin PSCs this will result in a material increase in their Indonesian acreage position and potential recoverable resource. The Barito Basin holds an approximate 100 tcf of Gas In Place (GIP) and is considered to be one of the world’s best undeveloped CBM basins.
Following this, CBM Asia can now move to the execution of the operation phase of their strategy whilst also farming out interest in their other majority-owned PSCs to reduce their forward capex requirement. Farming-down high interest positions offers CBM Asia to the opportunity to capture shareholder value whilst avoiding a significant capex burden while its assets move through field development.
GIN: Should investors expect other deals like ExxonMobil in CBM Asia’s future?
SW: Yes. I think we will continue to see more of it, we should also see the company farming-in and potentially picking up additional acreage nearby to continue the progressive strategy they have employed thus far – de-risking their positions and farming out.
GIN: CBM Asia anticipates gaining revenue from the Sekayu project as early as Q4 2013 through fuel sales. In terms of value, what does this project present for CBM?
SW: Well our discounted cash flow analysis of South Sekayu using a 10 percent discount rate values the project at C$105 million or $0.36 per share. CBM Asia currently trades at $0.18 per share, illustrating the compelling value in the company’s share price at present.
Obviously full value will be a function of the number of wells drilled and the flow rates achieved during pilot production. However, our valuation at present is reasonably conservative as it is yet to include the potential pilot production projects in the Barito basin and Central Sumatra scheduled later this year.
GIN: In October, CBM Asia announced that Netherland, Sewell and Associates had been commissioned to audit the CBM resources at Kutai West PSC. What results should investors expect?
SW: That’s quite a tricky question to answer with a strong degree of accuracy. If you look at the net acreage position, it is broadly similar to South Sekayu which is the only other prospect which has been externally valued to date and that is approximately 156 km 2. However, the estimated gas content is significantly higher at the Kutai West at c.250 scf /tonne. So if you apply a recoverable resource calculation, it wouldn’t be unreasonable to estimate a 2 tcf recoverable resource figure, however this could potentially be higher.
GIN: Do you see Kutai West as being a major asset for CBM?
SW: I think it could be potentially larger than South Sekayu on a gross level which forms the basis of our current valuation. Therefore all factors look promising for CBM Asia at present in terms of recoverable resource levels achievable from the asset. This year Newton Energy, the operator, plans to drill one exploration well in the western portion of the block and dewater the CBM-KW-01 well to prove the production potential and the extent of the coal seam sweet spots in the western portion of the block. Thus, it is an exciting time at this asset in particular, and if successful, could offer CBM Asia even more opportunities to expand their asset base.
GIN: CBM has raised its target to 15 tcf of recoverable, unrisked prospective resources. Do you foresee any challenges in CBM achieving this goal?
SW: I think given the company’s success so far, 15 tcf is quite a reasonable level for the company to maintain given their acquisitive strategy and history of proving up resource levels. In terms of challenges in relation to commercialization all CBM Asia’s acquisitions are strategically located near existing pipelines, power stations and LNG infrastructure for easy access and swift commercialization to premium priced domestic and export markets.
In relation to drilling challenges, exploration is in inherently risky whether it is conventional or unconventional. That being said the capex requirements of drilling CBM wells are quite low in comparison to typical conventional gas well. Overall, CBM wells often produce at a lower rate than conventional reservoirs, they typically peak at 300,000 cubic feet, and that could be the only challenge. But as they only run pilot production projects at the moment, I don’t foresee that as being a huge issue. I think 15 tcf can be quite reasonable.
GIN: In your July note, Seymour Pierce gave CBM Asia a ‘Buy’ rating with a target price of C$0.54. Has your target price changed?
SW: We will maintain our price target at present, as it is solely based on the South Sekayu PSC given that NSAI have externally validated the resource numbers here. However as the company implements pilot production facilities this year and NSAI appraises Kutai West, this will be a clear opportunity to review our price target.
GIN: So CBM Asia’s future looks promising.
SW: Most definitely, the company is rapidly moving in the right direction in terms of achieving their long term strategy in Indonesia. They have a strong pipeline of events coming up in 2013 and the Exxon deal marks something of a breakthrough for them.
GIN: That’s great. If any of our readers want to reach out the find out more about CBM what is the best way to reach you?
SW: I may be contacted by email at email@example.com.
Disclosure: This interview was prepared as part of CBM Asia’s paid advertising campaign with the Investing News Network. CBM Asia is a research client of Seymour Pierce. Neither the company nor Sam Wahab owns shares in CBM Asia. Sam has not visited CBM Asia’s properties.
Please contact Seymour Pierce for further disclosure information.