Comet Ridge Ltd building up gas reserves

Comet RidgeQuest recently took a placement in small gas explorer Comet Ridge Ltd at 10 cents per share. The company is a gas explorer in the Eastern Galilee and Bowen Basins in Queensland and in the Gunnedah Basin in northern NSW. The business plan is to build gas reserves in close proximity to existing producers. This strategy assumes nearby players are short of gas and in Queensland in particular the strategy appears sound. The gas exploration business has been the subject of much consolidation in recent years with Sunshine Gas taken over by Queensland Gas in 2008, Queensland Gas being taken over by British Gas in 2009, Arrow Energy taken over by Shell in 2010 and Bow Energy being taken over by Shell in 2011. Santos took over Eastern Star Gas in 2011 while PetroChina International purchased Queensland acreage from Molopo Energy in 2012. So yes there is a pattern developing here!

The demands of three under construction LNG export plants in Gladstone commencing first gas production in 2014 suggest that gas demand looks solid for the next decade. Comet has also struck a deal with Stanwell Power who hold an option to pay $1 million per petajoule of proven 2P gas reserves from Comet’s share of the Mahalo resource which currently sits at 193 petajoules of resource (not yet reserve). The arithmetic here is straight forward and suggests that the option could be worth far more than the current $65 m capitalisation of Comet Ridge. There is no certainty that this option will be exercised however the need to prove up the resource to reserve status is obvious.

Management appear to be ambivalent on the exercise of the option, suggesting other alternatives exist to monetise this asset.

Comet has an experienced management team with solid in the field experience. We like the optionality and positioning of the acreage and currently hold a valuation target beyond the current 17 cent price level. Quest purchased Comet shares in August 2012 in our high net worth portfolio.