Blue Energy : MST Access Research Report

Source: FactSet.

Blue Energy (BLU.AX) Initiation of Coverage

3 June 2021

Assets, Expertise, Gov't Gas Policy: It's All Coming Together for BLU

Blue Energy (BLU) represents a unique opportunity to obtain exposure to gas assets with significant reserves and resources in proven basins. BLU has strong potential to supply an east coast gas market needing significant new supply. Its management team is highly experienced in developing gas assets and bringing gas to market. The Federal Government has vigorously backed gas as Australia's key fuel to power manufacturing and transition to a lower- CO2 economy. BLU offers significant valuation upside.

Assets in Proven Basins - Gas Ready to Go

BLU has accumulated a diversified portfolio of 100%-owned, highly prospective assets in proven and producing oil and gas basins in Queensland (most of which are situated near established infrastructure) as well as emerging gas basins in the Northern Territory. BLU's key Bowen Basin tenements in Queensland cover 1,116km2 with significant Reserves and Resources (assessed by tier 1 Reserve certifier Netherland Sewell) and are adjacent to established coal seam gas (CSG) production.

Management - The Right Skills to Grow BLU

BLU's Executive Chairman, John Ellice-Flint (a petroleum geologist), has several decades of experience in the global oil and gas industry, and was instrumental in initiating Queensland's LNG industry as CEO of Santos. CEO John Phillips (also a petroleum geologist) has 35 years of operational experience in CSG and conventional gas production. The management experience positions the company to rapidly progress to production.

Federal Government - Gas-Led Recovery

The Federal Government has implemented a gas-led manufacturing plan post-COVID, using gas as a transition fuel to a reduced-carbon world. Incentives include underwritten gas agreements, potential NAIF funding of critical gas infrastructure, and opening up of new gas supply from North Bowen, Galilee, and Beetaloo basins. BLU is strongly positioned in all these basin areas to benefit from the government's gas strategy.

East Coast Market Needs More Gas

Blue Energy (BLU) explores, evaluates and develops conventional and unconventional oil and gas, principally in Queensland and the Northern Territory. BLU's diverse portfolio involves five key geographical basins. The main and most developed is the Bowen Basin in Queensland.

Key investment highlights:

• Exposure to new gas basin plays
• BLU is Operator - controls own destiny
• BLU has 100% in key tenements
• Large gas resource and 2P reserves
• Low finding cost
  https://blueenergy.com.au/

Michael Bentley [e-mail]

Stock	ASX: BLU
Price	A$0.075
Market cap	A$100m
Valuation (per share)	$A0.46

Next steps

Signing of further gas	Ongoing
sale agreements
Gov't incentives	2021

BLU share price (A$) - 1 year

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The outlook for East Coast supply remains tight as gas production from long standing conventional gas fields in Gippsland and Cooper

basins is in rapid and irreversible decline. New gas supplies are needed, and BLU is well positioned. BLU has executed HOAs for long term gas supply to leading utilities Energy Australia & Origin Energy.

Valuation - Multiple Scenarios - Range of A$0.20-A$0.46

Our base valuation of A$0.20 is derived by estimating the value of developing the Sapphire project in the Bowen Basin. The valuation of this asset implies a BLU shareholder obtains this project at a substantial discount and has exposure to the remainder of BLU's substantial gas Resources in Queensland and exploration potential in the Northern Territory for free. The upper valuation of A$0.46 is derived from market average EV/ Resource multiples. The key risks relate to lack of development of a pipeline in the Bowen Basin and non-completion of further gas sales.

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Exhibit 1 - Company summary

Blue Energy Limited	(ASX:BLU)
Ratio Analysis	2018A	2019A	2020A	2021E	2022E	Assumptions (Yr end Jun)		2018A	2019A	2020A 2021E	2022E
EPS (A¢)	(0.14)	(0.48)	(0.39)	0.04	0.04			BLU v XEJ Relative 1 Year
P/E (x)	-	-	-	202.0	169.8
350
EPS Growth (%)		n/a	n/a	-110%	19%			BLU	XEJ
CFPS (A¢)	(0.09)	(0.09)	(0.08)	0.03	0.03	300
P/CF (x)	-	-	-	244.7	261.6
DPS (A¢)	-	-	-	-	-	250
Dividend Yield (%)	-	-	-	-	-	200
Profitability Ratios	2018A	2019A	2020A	2021E	2022E	150
EBIT / Sales (%)	0%	0%	0%	0%	0%	100
PBT / Sales (%)	0%	0%	0%	0%	0%
Return On Assets (%)				1%	1%	50
Return On Equity (%)				1%	1%	Jun-20	Aug-20	Oct-20	Dec-20	Feb-21	Apr-21	Jun-21

Liquidity Ratios	2018A	2019A	2020A	2021E	2022E
Net Debt / Net Debt + Equity (%)	4%	7%	6%	7%	7%
EBIT / Interest (x)	0.0	0.0	0.0	0.0	0.0
Current (x)	7.5	10.2	9.5	10.0	10.5

NAV	A$m	Risking	A$m	A$ps
ATP 854 P (1C + 2C) Surat - 100%	26	100%	26	0.02
ATP 813 P (2C) Galilee - 100%	23	100%	23	0.02
ATP 814 P (Sapphire & Central 2P + 2C) -100%	103	100%	103	0.08
ATP 814 P (Monslatt & Hillalong et al (2C) -100%	315	100%	315	0.24
Total Operations	466		466	0.35
Net Cash / (Debt)	5	100%	5	0.00
Admin / Corporate	(3)	100%	(3)	(0.00)
Other / Investments	0	100%	0	0.00
Exploration (risk-adjusted)	2	100%	2	0.00
Other 3C gas (Sapphire & Central risked)	108	100%	108	0.08
TOTAL VALUATION	578		578	0.43
Number of Fully Diluted Shares (m)				1,329
Price / NAV (x)				0.17
Premium / Discount to current share price				-83%

Profit & Loss (A$m)	2018A	2019A	2020A	2021E	2022E
Oil / Condensate Revenue	-	-	-	-	-
LPG Revenue	-	-	-	-	-
Gas Revenue	-	-	-	-	-

Total Sales	-	-	-	-	-
Operating Costs	-	-	-	-	-
Government Resource Taxes	-	-	-	-	-
Exploration & Development Expenses	(0)	(4)	(4)	(1)	(0)
Other Net Income / Expense	(2)	(2)	(1)	1	1
EBITDA	(2)	(6)	(5)	0	1
EBITDAX	(2)	(6)	(5)	1	1
Depreciation & Amortisation	0	0	0	0	0
EBIT	(2)	(6)	(5)	1	1
Net Interest Expense	0	0	0	0	0
Pretax Profit	(2)	(6)	(5)	0	1
Tax Expense / Benefit	-	-	-	-	-
Net Attributable Profit	(2)	(6)	(5)	0	1
Reported Profit	(2)	(6)	(5)	0	1
Cash Flow (A$m)	2018A	2019A	2020A	2021E	2022E
Pretax Profit	(2)	(6)	(5)	0	1
D&A	0	0	0	0	0
Tax Paid	-	-	-	-	-
Cash from Operating Activities	(1)	(1)	(1)	0	0
Development Capex	-	-	-	-	-
Exploration Capex	-	-	-	(1)	(1)
Acquisitions/Other (Net of Sales)	-	0	-	-	-
Dividends Paid	-	-	-	-	-
Free Cash Flow	(2)	(2)	(2)	0	0
Cash Provided by Financing	2	4	1	-	-
Net Change in Cash	0	2	(1)	0	0

	Reserves and Resources	1C Gas	2C Gas	2P Gas	3C Gas	3P Gas			Balance Sheet (A$m)	2018A	2019A	2020A	2021E	2022E
		(PJ)	(PJ)	(PJ)	(PJ)	(PJ)			Cash & short term deposits	3	5	4	5	5
									Receivables	0	0	0	0	0
	ATP 854 P (Surat)	22	47	-	101	-			Inventories	0	-	-	-	-
	ATP 813 P (Galilee)	-	61	-	830	-			Property, Plant and Equipment	0	0	0	0	0
	ATP 814 P (Bowen)								Capitalised exploration	66	62	59	59	59
	Sapphire	66	108	59	186	216			Intangibles and Goodwill	-	-	-	-	-
	Central	50	99	12	306	75			Other assets	0	0	0	3	3
	Monslatt	-	619	-	2,054	-			Total assets	69	68	64	67	67
	Lancewood	5	23	-	435	1			Creditors	0	0	0	0	0
	South	15	27	-	30	6			Borrowings	-	-	-	-	-
	Hillalong	-	182	-	237	-			Other liabilities	1	1	1	3	3
	Sub total	136	1,058	71	3,248	298			Total liabilities	1	1	1	4	3
									Shareholder equity	68	66	63	63	64
	Total	158	1,166	71	4,179	298			Shareholder Equity + Total Liabilities	69	68	64	67	67

Source: BLU, MST Access.

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Investment Thesis: Gas - Market Needs More, Government Wants More. BLU Has It - and Has the Skills to Deliver It

We believe BLU has the potential to become Australia's leading mid-sized oil and gas exploration and production company.

The company's strategy provides exposure to a well-balanced portfolio with proven basins, with a large gas resource and 2P reserves that are primed for commercialisation. Frontier basins provide exposure to longer-term growth. BLU is operator of all its assets and therefore controls its own destiny. 100% ownership of its assets adds flexibility around ownership structures and potential funding options. BLU has proven to be efficient with its capital, with ~90% of expenditure being spent in exploration and assessment, leading to low finding costs.

We value BLU at A$0.20 - A$0.46 and see significant upside as BLU works towards delivering gas to the undersupplied East Coast gas market.

A Compelling Picture: Strong Assets, Skilled Management, Attractive Environment,

Diversified asset base with strong production history: ready for commercialisation. BLU's diversified asset base is spread across five basins throughout Queensland and the Northern Territory (NT). The Bowen and Surat basins, both in Queensland, are home to BLU's most advanced assets. Both basins have a strong history of gas production. A historical exploration programme of some A$110m means BLU possesses a large reserves and resources base within these two basins. The resulting resource and reserve bookings have yielded one of the lowest "finding cost" metrics in onshore Australia.

BLU's gas assets have high probability of near-term commercialisation. The North Bowen assets are development- ready, requiring only a 450km pipeline from Moranbah and the Wallumbilla interconnect. This pipeline will give North Bowen Basin gas access to the large East Coast gas market. The Federal Government is identifying priority pipelines and critical infrastructure as part of an inaugural National Gas Infrastructure Plan (NGIP) worth $10.9m that will also highlight where the government will step in if the private sector doesn't invest.

BLU has signed multiple HoA's of 10-15 year periods, to supply gas from its Bowen Basin tenements north to the Townsville domestic market and to the southern markets. These HoA's have been signed with Energy Australia and Origin, two of Australia's largest wholesale and retail energy utilities, and Queensland Pacific Metals for their new Nickel refinery in Townsville.

BLU is seeking further southern offtake volumes to secure the economic underpinning for construction of a minimum 18" gas pipeline from Moranbah into the East Coast gas pipeline grid. Construction of this pipeline is essential for unlocking the estimated 15,000 PJ of gas resource in the North Bowen Basin and securing long-term gas supply for the domestic gas market.

Management experience ideal. BLU's management team has ideal experience to execute the company's strategy to deliver gas to the east coast market. Executive Chairman John Ellice-Flint joined BLU in 2012. Mr Ellice-Flint's tenure as Santos CEO is widely seen as critical to the Santos' success. Under his leadership, the Company commenced Gladstone LNG, the world's first LNG project to utilise CSG. This was the catalyst for major structural change in Australia's gas market as the Queensland LNG boom transformed the domestic market to one with tight supply with prices linked to global LNG. John Phillips, a 35 year oil and gas veteran, joined BLU in 2009 as COO and was appointed CEO in 2010. He has strong operational CSG and Conventional gas experience and has been instrumental in accumulating an outstanding asset base at BLU and overseeing a drilling programme that has booked significant resources.

Market is primed for more gas; government policy is encouraging. The East Coast gas market supply situation is deteriorating, and new supply is required in order to meet demand. In addition, the Federal Government is increasingly supporting the development of gas assets, seeing gas as the key fuel to sustain a post-COVIDmanufacturing recovery and transition to a lower-carboneconomy.

Both the Bowen and Galilee basins are being specifically promoted by the government as long-term new gas supply regions for the East Coast gas market and these volumes are a key input to economic growth and power generation as part of the National Gas Infrastructure Plan.

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Corporate Profile

Strong reserves and resources growth since maiden reserve in 2011. BLU started out as a private petroleum exploration company with assets in several producing Australian basins. Listed in 2006, BLU has a history of strategically acquiring assets in proven basins, conducting drilling programmes and booking significant resources and reserves. BLU's maiden reserve was booked on ATP814P in the Bowen Basin in 2011 and the latest resource in 2019. The growth in reserves and resources in that period was significant.

Commercial focus in recent years after strong exploration spend. BLU's incumbent management team has seen around ~A$110m spent on exploration and development. Over the last few years, BLU has focused on commercialising the gas and signing gas agreements.

See Appendix 1 for a full history of BLU.

Recent Events: Closer to Commercialising as Government Steps Up Support for Gas

2021

• May: Federal Government commits A$15.6m to gas appraisal projects in Bowen and Galilee basins
• May: National Gas Infrastructure Plan (anticipated completion by 3rd quarter 2021) incorporates North Bowen Basin gas resources into the national gas infrastructure priority spend for east coast supply
• May: Federal Government matches the $5m Queensland Government expenditure for an economic feasibility study of the Moranbah - Wallumbilla Gas pipeline connection (due for completion 3rd quarter 2021).
• March: BLU and Origin Energy sign Heads of Agreement for up to 300 PJ of new long-term (10 year) gas supply

2020

• December: BLU and Energy Australia sign Heads of Agreement for 100 PJ of new long-term (10 year) gas supply
• October: BLU and Stanmore Coal sign MOU on fugitive gas emissions
• September: Federal Government targets fast-tracked domestic gas supply, with potential benefits for BLU given its gas assets in the Bowen, Galilee and Beetaloo basins
• August: Queensland Government commits to spend $5m on Bowen Basin Gas Pipeline Study

2019

• November: BLU and Queensland Pacific Metals sign 15 year 112 PJ gas suply MOU for proposed Townsville Nickel refining project

Potential Near-Term Catalysts and Timing

• Ongoing: Signing of further gas supply contracts
• Ongoing: Further government incentives to production eg single large gas diameter pipeline and underwriting gas contract commitments
• Q3 2021: Queensland and Federal Government feasibility study for Bowen pipeline south to market
• Q3 2021: Application for Federal Government grants for North Bowen drilling activity
• Q4 2021: Progress on pipeline link between Moranbah and the Gladstone/Wallumbilla interconnect

Valuation - Multiple Scenarios - Range of A$0.20-A$0.46

We have developed several valuation scenarios including valuing production from the Sapphire Gas Project in the Bowen Basin, EV/Resources and recent acquisition comparatives. Our base valuation for BLU is A$0.20 for the development of the Sapphire project in the Bowen Basin. This valuation implies a BLU shareholder obtains this project at a significant discount and has exposure to the remainder of the BLU's significant resource base in Queensland and exploration potential in the Northern Territory for free. The high side valuation of A$0.46 is based on market average EV/ Resource multiples, demonstrating further upside.

The key risks to BLU relate to lack of development of pipeline infrastructure in the Bowen Basin and lack of completion of further gas sales agreements.

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Assets: Balanced Portfolio Creates Opportunity and Diversifies Risk

Asset Overview: Good Likelihood of Success from Diversified Asset Base

BLU has accumulated a diversified asset base across several established and emerging basins, where management has extensive experience and deep knowledge. The Bowen Basin is the key shorter-term driver of BLU's value, BLU's assets are compatible with the company's stated strategy of focusing on both the northern and east coast gas markets. Most assets are near established infrastructure with the potential to lead to rapid commercialisation upon successful exploration and appraisal.

Apart from using its own work program to add value, BLU utilises adjacent competitor activity and results to enhance the value of its portfolio by targeting areas most like competitors' successful exploration or producing wells. This minimises the use of shareholder funds whilst maximising the benefit of competitor expenditure to BLU. BLU is focused on capitalising on significant gas demand along Australia's east coast amid a global background of increased energy needs. The overall probability of success has been heightened by BLU's strategic decision to spread its exploration and appraisal risk, rather than relying on a single asset.

BLU will seek to continue to acquire projects in areas adjacent to established infrastructure. BLU's assets could appeal to potential partners and could be commercialised via a selldown to a JV partner as well.

Exhibit 2 - BLU asset summary

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Asset	Targeting	Reserves /	Holding	Status	Basin ProductionStatus
Resources
					Drilling undertaken focussed on the
	Rangal Coal Measures,	71PJ 2P and			Sapphire Block. 3 HoA's for long term
ATP814P, Bowen Basin, QLD	Fort Copper Coal	298PJ 3P, 136PJ	100%	Proven	gas supply are signed. Additonal long-
Measures, Moranbah	1C, 1058PJ 2C	(Operator)	term gas supply agreements with other
	Coal Measures	and 3248PJ 3C			domestic gas users are being sought. 3
					Production Licence Applications lodged.
					ATP 854 sits adjacent to the giant
	Permian Bandana				Fairview and Spring Gully CSG fields
				operated by GLNG and APLNG, with
	Coal Measures,
				both fields having gas production from
	Jurassic Walloon Coal
ATP854P, Surat Basin, QLD	22PJ 1C, 47PJ	100%	Proven	the Permian/Bowen Bason coals.
Measures,	2C, 101PJ 3C	Potential Commercial Area Applications
	Conventional Jurassic
	Oil (Precipice				(PCA's) over the Permit with the
				Queensland Government to secure
	Sandstone)
				these resources. Continued marketing
					of the gas resources to potential buyers.
	Aramac Coal			Later	PCA applications over the ATP813
	Measures, Betts Creek	62PJ 2C, 838PJ,		permit remain with the QLD
ATP813P, Galilee Basin, QLD	100%	Stage
Beds, Hutton	3C	Department of Resources for grant. BLU
		Emerging
	Sandstone			have drilled 6 CSG coreholes in total.
	Cambrian Shale
	sequence, Cambrian		50% (post		Early geological work has been
Greater McArthur Basin, NT	carbonate and clastic		Emerging
	sequences,		farm in)		conducted.
	Proterozoic section
	Cambrian-aged
	Arthur Creek Shale		Preferred
South Georgina Basin, NT/QLD Border	Formation,		Tenderer at	Emerging	Sparsely explored to date.
	Thorntonia Limestone,		100%
	Steamboat Sandstone
	Toolebuc Formation		Preferred
ATP1112A, Carpentaria Basin, QLD	and Proterozoic /		Tenderer at	Emerging	Little exploration seismic or drilling.
	Cambrian		100%

Source: BLU

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