Cooper Energy is ironing out problems associated with the Orbost gas plant and the subsequent performance of Sole gas production will be critical to the outlook

-Gas sales supported by third-party purchases, compensation from APA Group
-Athena plant to take over Cooper Energy's gas processing in Otway
-Upcoming risk in the abandonment of Basker Manta
 

Impetus for Cooper Energy ((COE)) needs to come from better performance from the Sole gas field, as production has been beset by problems stemming from the performance of the Orbost gas processing plant.

June quarter production was 0.66mmboe along with sales of 0.97mmboe, in line with the most recent guidance, and taking FY21 production to 2.6mmboe. Problems at the Orbost plant were exacerbated by reduced availability from the Iona gas plant (owned by Lochard).

Gas sales in the period were supported by third-party purchases and compensation from APA Group ((APA)), the owner/operator of the Orbost plant, helping to preserve cash margins. Cooper Energy is supplying some gas from its Otway operations (Casino Henry) into Sole to reduce reliance on third-party purchases.

Morgans asserts this was an important feature of the update, as it shows customer alignment/relationships are being maintained. Ord Minnett also notes a "reasonable" margin was generated on third-party sales as the cost was materially less than the company's average realised gas price.

Capital works will be carried out at Orbost to improve production rates and stability while the upgraded Athena plant will take over gas processing in the Otway from Iona later in 2021, with the expectation that reliability will be substantially improved.

Macquarie points out, in moving to Athena from Iona, there are tangible benefits from self-owned "uninterruptible" processing capacity, noting the experience when Lochard turned of capacity for Cooper Energy's gas processing at Iona periodically.

FY21 has been difficult, Canaccord Genuity agrees. Still, gas prices are rising and there is some optimism regarding the future performance of Orbost, so a Buy rating is maintained. More conservative assumptions mean the broker, not one of the seven monitored daily on the FNArena database, has lowered the target to $0.45 from $0.49.

Spot gas prices in Victoria averaged $9.60/gigajoule in June, and in July to date have averaged $17/gigajoule amid a tight market. Canaccord assesses that with production from Esso/BHP Group ((BHP)) on the decline in Bass Strait, and few new projects around, Victoria is the most vulnerable gas market on the east coast.

In turn, this provides a positive growth signal for the Athena gas plant, which Cooper Energy expects will be commissioned in the December quarter. The works should deliver lower operating costs, increased production and, potentially, reserves, opening up the development of Annie, Henry-3 and future discoveries, the broker suggests.

Orbost

Fouling issues at the Orbost gas plant have continued with the sulphur absorbers now being cleaned every two weeks to maintain stable production. Cooper Energy and APA Group have approved the next phase of works, 2B, which will involve revisions to the distribution system and the inclusion of the filtration circuit.

Morgans acknowledges further information is required regarding the new filtering technology yet highlights, over the last month, the daily performance at Orbost has been better. With frequent cleaning the broker is more confident Sole can continue to produce an average 40-45TJ/day of gas.

Canaccord expects the works will cost around $20m, based on previous indications, and could increase capacity towards 50TJ/day. Jarden factors in $30-40m in expenditure in FY22, with peak production of 55TJ/day after the activities have been completed. Work to identify the actual cause of the fouling is ongoing and more detail is expected at the August results.

Macquarie points out that expenditure and sharing between Cooper Energy and APA Group has not yet been confirmed and the performance of Sole gas following the phase 2B works will be critically important.

Debt

Cooper Energy and its lenders have a facility adjustment which includes a realignment of principal repayments. The alignment with a re-based production level of 40-45 TJ/day for Orbost's gas processing plant will also preserve liquidity for advancing current growth projects.

The company intends to refinance and expand the Sole debt facility, which is still maturing in 2024. The timing of the final investment decision on Annie and Henry will depend on drilling rig availability, funding and marketing optimisation. Yet Morgan Stanley assesses the medium-term risk is the upcoming Basker Manta abandonment.

The broker forecasts net debt of $127m will remain flat over the next 12 months and then increase significantly to $200m in 2022, given the capital outlay required for abandonment. As a result, Morgan Stanley suspects Cooper Energy will need to expand its debt facilities.

Jarden, in valuing Cooper Energy, includes a risked value for the undeveloped Manta gas field as well as liabilities for abandonment of Basker Manta. The broker also assumes the cost of capital will rise over time to reflect reduced investor appetite to own the sector, although the company's lower emissions places it at an advantage relative to peers.

Jarden, not one of the seven monitored daily on the database, has an Overweight rating and $0.32 target. The database has two Buy ratings and three Hold. The consensus target is $0.35, suggesting 46.7% upside to the last share price. Targets range from $0.29 (Macquarie) to $0.45 (Ord Minnett).

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