CNX 0.00% 7.4¢ carbon energy limited

cash burn problem / oil price

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    With an LNP government, I rated CNX's chances of approval for Blue Gum at around 80%. Under Labor, I think the probability of approval is around 60% – not bad odds, but not the near certainty it was under the LNP.

    The key probem facing CNX now is timing. Even with their reduced cash burn plan and new financing facility in place, CNX are likely to be completely out of cash by November this year. In practical terms, this means they will have to raise more capital by June or July at the latest. If approval is given before then, capital raising will be no problem. But if the new minister takes his/her time to get their head around the project, and a decision is delayed until late this year or next year, then CNX is in real trouble. Without a positive decision on blue gum, CNX may struggle to raise funds even at 1.5c. I imagine the new minister will take a few months at least before they even look at Blue Gum. My 40% probability of a negative decision is due to the likelihood of some community backlash against UCG. labor is historically more sensitive to community/environmental concerns than the LNP.

    The other factor to keep an eye on is the consensus long term assumption about the oil price because the asian gas price (and, eventually, the australian domestic price) is determined in large part (although not entirely) by the oil price. Asian LNG prices are already falling sharply and are expected to fall by a further 30% this year alone. The economics of Blue Gum were not particularly compelling even when high oil/gas prices were assumed last year. If these low oil/gas prices become the new long term norm, I don't see potential funders (including incitec pivot) ever stepping up to the plate for blue gum.

    One final point: Carbon Energy would be wise to take the big photo of Campbel Newman off the home page (news section) of their website; not a good look if the company is trying to garner favor with the new labor government.
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