The next important steps towards finalising the Vali project are underway. The Gas Sales Agreement with AGL has been signed and the remaining field work is underway.
The Vali joint venture and AGL have now signed a final GSA (Gas Sale Agreement) following the completion of the processing agreement with the Moomba JV (pipeline access to market).
The GSA covers the sale of all gas produced from the Vali field from start-up in mid-2022 through to the end of CY26.
AGL will now pay an upfront $15 million (3 separate $5m payments) to the Vali JV (VEN 50%) with the total amount received by the end of the current quarter. This money will pay for the completion of all three Vali wells and the tie-in of the field to the nearby (14km) Moomba pipeline network which will also include the adjacent Odin well.
Our recent site visit demonstrated the operational professionalism across VEN. The fracture stimulation of Vali-2 and Vali-3 is being undertaken by industry specialists, Schlumberger. There is about $50 million of kit, and 42 people housed on site with full catering and on-site power. The nearest point of civilisation is 1.5 hours away to the celebrated Innamincka Hotel.
Subject to Ministerial approval, the JV of VEN, Metgasco and Bridgeport will acquire Beach Energy’s 15% interest in the Cooper Basin licence PRL 211 (Odin). Post completion, VEN will own 50% of Odin and will be the operator. The transaction gives the JV Beach’s 3.1 BCF equity share of the Odin contingent resource (2C). VEN’s share will increase to 17.5 BCF. The total cost of the transaction will be $2.25 million on achievement of production milestones.
Odin is attracting strong interest in securing long term gas supply and will form part of the commercialisation plan for the asset.
It’s not all good news for VEN. The Cervantes well in the onshore Perth Basin was drilled, plugged and abandoned recently after no hydrocarbons were found.
Investment view
With the Vali GSA now in place, VEN has delivered on its most critical project so far and it has done it with aplomb. It is certainly a feather in the cap of the VEN management that has executed a textbook plan.
The east coast gas markets of Australia are increasingly feeling the chill winds of the global gas market dislocation, particularly due to the Russian invasion of Ukraine and Europe’s unbalanced approach to supply.
Spot LNG prices have strengthened considerably over the last year, and this is translating into higher domestic gas prices on Australia’s east coast. The local situation is exacerbated by declining production in Queensland and Victoria where state government policy has restricted the discovery of new resources.
All this is playing into VEN’s hands. Spot gas prices on the east coast have risen from A$10/GJ at the start of the year to around A$16/GJ now. The spot price is still significantly under the LNG netback price to which local gas prices are inextricably linked. Spot pricing will inevitably influence contract pricing which is typically negotiated for terms of 3-5 years.
After adjusting our valuation for the Cervantes exploration failure, we now value VEN at $0.22 per share (was $0.25/share). We conservatively assume an east coast spot gas price in FY23f of A$10/GJ and a long-term gas price of A$11.50/GJ.
Risks to investment view
As an oil and gas exploration and development business, VEN is subject to the usual risks associated with this industry. Testing and appraisal of existing projects may not lead to reserve definition. An inability to commercialise projects such as Nangwarry, would be negative for VEN. Disappointing exploration results would also be seen as negative. Access to funding is necessary to develop projects and failure to achieve this aspect would be negative. VEN is exposed to gas prices which can be volatile.
Recommendation
We have retained our Buy recommendation.
