Vintage Energy is on the cusp of becoming a producing gas entity at a time when East Coast gas prices are very high. The slippage of first gas into January 2023 may prove a blessing in disguise as a fretful market will pounce on VEN gas like a seagull on a chip.
The Vali and Odin conventional gas fields in the Cooper Basin have been developed relatively quickly and have produced high quality gas at high rates – desirable qualities for low cost development. Connection to the Santos network and from there to the East Coast gas market is about to happen at a time when manufacturers are clawing each other’s eyes out for ‘affordable’ gas.
Markets. The spot East Coast gas market price has increased significantly in CY22 from A$10/GJ to over A$23/GJ. The confluence of global supply side issues, increasing demand and a tight domestic market has pushed local prices up.
Contracted gas on the East Coast is typically selling for between A$10-15/GJ, with spot prices much higher.
First gas had previously been pencilled in for mid-2022, but wet weather has pushed this back to January 2023. This is small beer in the context of the story.
Resources. The total 2P resource at Vali is 101 PJ (VEN share 50.5 PJ). Odin reserves so far amount to 40 PJ of 2C gross (VEN share ~19 PJ). VEN completed a GSA (Gas Sales Agreement) with AGL in May this year The GSA covers the sale of 9-16 PJ of (gross) gas produced from the Vali field from start-up through to the end of CY26. AGL has prepaid $15 million to the Vali JV (VEN 50%). Vali therefore has approximately 85 PJ (VEN share 42.5 PJ) of uncontracted gas to sell into the East Coast market.
VEN is accelerating development of Odin for connection to Vali via a pipeline that is under construction. Timing is for supply to commence 3Q of 2023. Odin gas is also uncontracted at this point, but strong customer interest indicates the urgency with which customers are seeking out supply. VEN is waiting for ACCC approval to market the gas and is hoping to commence this by the winter months when customers need it the most.
Learn and earn. VEN’s strategy is to ‘appraise by production’, or as we think of it – learn and earn. This means early production performance from the first three Vali wells will be used to inform additional drilling locations to determine the limits of the field.
This strategy is not unique and has been used successfully by other companies. Several of VEN’s technical team have direct experience from those other operations. The 3P reserve estimate at Vali is 210 PJ suggesting substantial upside is available from on-going appraisal.
Investment View
On the smell of an oily rag, the old heads at VEN have pieced together a producing gas company (imminent) in very quick order. Capex of about $56 million since IPO in mid-2018 has been used to explore and develop 51 PJ of 2P gas from just 8 wells. There is no processing required and VEN will simply ‘plug and play’ the Vali and Odin gas straight into the Santos gas network – the Moomba pipeline.
The timing is uncanny. The East Coast gas market is already in short supply. The ACCC has forecast a potential gas supply shortfall of 30 PJ pa as early as 2024, expanding to a potential shortfall of 358 PJ pa in 2032.
The GSA with AGL demonstrates the marketability of the product that will soon be available. The AGL GSA has contracted just 16% of the current 2P reserves (in the upside case for the AGL contract). This puts VEN in a very strong position to replicate the GSA with other gas-hungry customers on the eastern seaboard.
For that reason, we do not see any new funding required.
VEN has a portfolio of other projects in various stages of exploration and development, but these remain minor compared to the main game in the Cooper Basin.
CEO Neil Gibbins (a geophysicist) has spent more than 30 years tramping Cooper Basin dust under his boots. His team are just as crusty. We should not be surprised that their discovery at Vali (and Odin) is the largest in the Cooper Basin for many years. Gibbins notes there are many more gas and oil prospects in the surrounding area that offer yet more paydirt in due course.
Unsurprisingly, Vali and Odin dominate our valuation which is 20cps based on a long term East Coast gas price of A$12.00/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.
