MPO 0.00% 14.0¢ molopo energy limited

looks like a key consolidation target

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    QGC Result: Why we like this industry

    Queensland Gas Company has just reported its results for the six months ended December. Stripping out the corporate and one-off costs, we can quickly find out why the coal seam gas industry is so attractive to investors. Despite selling gas under legacy gas contracts at ultra-cheap prices averaging $2.58/Gj and rising field production costs QGC managed a 51 percent gross margin in the half year. As coal seam gas prices are moving up steadily we see gross margins in this business reaching 60-65 percent before too long.

    The coal seam gas industry is still in the early “land grab” phase with people turning outback Queensland and NSW into swiss cheese by drilling hundreds of linear kilometres of gas wells. Once the land grab phase is finished – it probably has another 6-9 months to run - wewill move into the industry consolidation phase where stronger players use their higher-rated paper to buy smaller companies that have large reserves positions but have failed to translate those reserves into significantly higher share prices.

    In our view the key consolidation targets are Sunshine Gas (SHG), Molopo (MPO) and Pure Energy (PES) as they have proven, certified reserves of gas near crucial markets (PES is an exception but its fields are in the “golden mile”) and they are close to pipeline infrastructure and thus will be the lowest-cost new entrants to the market. All are trading at a steep discount to valuation. Natural acquirers are the bigger coal seam gas pure plays – QGC and Arrow – and the integrated companies such as Santos and AGL Energy which are fundamentally short of long term gas.

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