CBM Asia Development Corp.

Transcription

Siddharth Rajeev, B.Tech, MBA
Analyst
Kevin Liu, BBA, B.Sc.
Research Associate
Investment Analysis for Intelligent Investors
March 18, 2009
CBM Asia Development Corp. (TSXV: TCF) –Initiating Coverage; Exploration and Development of
Coal Bed Methane in Indonesia
Sector/Industry: Oil & Gas
www.cbmasia.ca
Market Data (as of March 17, 2009)
Current Price
$0.255
Fair Value
$0.58
Rating*
BUY
Risk*
5 (Highly Spec)
52 Week Range
N/A
Shares O/S
38.36 mm
Market Cap
C$9.78 mm
Current Yield
N/A
P/E
N/A
P/B
1.55
YoY Return
N/A
YoY TSXV
-67.9%
*see back of report for rating and risk definitions
1400000
$1.00
$0.90
1200000
$0.80
1000000
$0.70
$0.60
800000
$0.50
600000
$0.40
$0.30
400000
$0.20
200000
$0.10
0
18-Aug-08
28-Sep-08
08-Nov-08
19-Dec-08
29-Jan-09
$0.00
11-Mar-09
Investment Highlights

 CBM Asia focuses on the exploration and development of coal bed methane
(CBM) in Indonesia.

 The company holds 40% net working interest in two participation agreements,
which allow it to explore the Kutai and Sangatta blocks in the Kutai Basin. The
entire Kutai Basin has large coal resources, and is estimated to contain over 80
Tcf of CBM in place (according to research published by the Society of
Petroleum Engineers).

 The company recently signed a Production Sharing Contract (PSC) with the
Indonesian government to develop and produce CBM in a 760 km2 area (the
Kutai West PSC). The PSC covers a portion of the Kutai block, and extends
beyond the Kutai block to the west.

 Overall, the Kutai West PSC area, and the Kutai block, are estimated to hold a
total of 8.2 Tcf gas in place according to a company study and UPN (an
independent University in Indonesia), with the company holding 0.97 Tcf after
deducting partners’and government interests.

 Th
ec
o
mp
a
n
y
’
sc
u
r
r
e
n
tf
o
c
u
si
st
owork on the Kutai West PSC area, which
includes plans to delineate a 3P reserve estimate, drill 5 production pilot wells
and ultimately deliver produced CBM to the nearby Bontang facility for
processing.

 I
n
d
o
n
e
s
i
a
’
se
n
e
r
g
yi
n
d
u
s
t
r
yi
swe
l
le
s
t
a
b
l
i
s
h
e
d wi
t
hg
o
o
di
n
f
r
a
s
t
r
u
c
t
ur
e
.
Declining oil production and liquefied natural gas (LNG) production for
exports in recent years, and the expected long-term growth in domestic gas
consumption, have provided incentives for the government to explore and
d
e
v
e
l
o
pt
h
ec
o
un
t
y
’
sCBM resources.

 At the end of September 2008, the company had $4.30 million in cash. In
addition, the company recovered $1.04 million from its investment in ABCPs
in February 2009. We believe the company has sufficient cash to fund its
working capital and capital expenditures for the next 18 months.
Risks

 Th
ec
o
mp
a
n
y
’
sp
r
o
j
e
c
t
sa
r
es
t
i
l
li
nv
e
r
ye
a
r
l
ys
t
a
g
e
s. Despite having estimates
for gas in place, no proven reserves have been defined.

 Access to capital and share dilution.
Key Financial Data (FYE - Dec 30)
(C$)
Cash + Short Term Investments
Working Capital
Oil and Gas Projects
Total Assets
Net Income
EPS
2008 (9 mo)
4,302,241
4,310,660
1,365,530
6,312,935
(762,948)
(0.02)
CBM Asia Development Corp is a Canadian Based company focusing on the exploration and development of coal bed methane in Indonesia. The company
holds 40% interest to explore the Kutai and Sangatta blocks in the Kutai Basin. The company has recently entered into a Production Sharing Contract (PSC)
with the Indonesian government to develop and produce CBM in a 760 km2 area. The company holds 18% net interest in this property.

2009 Fundamental Research Corp.
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
CBM Asia Development Corp. (TSXV: TCF) –Initiating Coverage
Company
Overview
Page 2
CBM Asia Development Corp. is a Canadian-based company focusing on the exploration
and development of coal bed methane (CBM) in Indonesia. The energy industry in Indonesia
is well established both domestically, and internationally, with good infrastructure. The
country is one of the most important natural gas exporters in the world. Several major oil and
gas companies have significant operations in the country. The declining oil and liquefied
natural gas (LNG) production for exports in recent years, and the expected long-term growth
in domestic gas demand, have provided incentives for the Indonesian government to
encourage development of alternative energy supplies. New legislation has opened 450 Tcf
of CBM opportunity in t
h
ec
oun
t
r
y
’
si
mme
n
s
ec
oa
lr
e
s
e
r
v
e
s
,wh
e
r
e
b
ythe government
currently takes 55% interest in CBM projects, as compared to up to 70% interest in
conventional oil and gas projects.
Among one of the first few companies to take advantage of the CBM potential, CBM Asia
has two participation agreements to explore the Kutai and Sangatta blocks in the Kutai Basin
in East Kalimantan province. The neighboring two blocks represent approximately 12,830
km2. The company has recently signed a deal with the Indonesian government to develop
and produce CBM in a 760 km2 area, which covers a portion, and extends to the west of the
Kutai Block (the Kutai West PSC). The company holds a 18% net working interest in the
Kutai West PSC area. The Kutai West PSC, and the Kutai block, have a combined 8.2 Tcf of
gas in place. CBM Asia’
sc
ur
r
e
n
twork is focused on the Kutai West PSC area, which
includes plans to delineate a 3P reserve estimate, drill 5 production pilot wells, and
ultimately deliver produced CBM to the nearby Bontang facility for processing. It is also the
compa
n
y
’
sob
j
e
c
t
i
v
et
oc
on
t
i
n
ueconducting geological and land position studies aimed at
acquiring more prospective acreage in the Kutai Basin.
Investment Thesis and Valuation Summary: CBM Asia represents an investment
opportunity in coal bed methane in Indonesia. We think th
ec
ompa
n
y
’
sc
ur
r
e
n
tvalue is
primarily based on its projects in the Kutai West PSC area, and the Kutai block, which
entitles the company to 0.97 Tcf prospective gas in place (GIP), out of a total of 8.2 Tcf,
after deducting its partners’and government interests. Currently, the market values 3P CBM
reserves significantly higher than gas in place estimates, as GIP is only a prospective
resource estimate and future discovery and development of these resources are still
uncertain. CBM Asia has not conducted any drilling on its projects. Although we note that
the c
ompa
n
y
’
spr
oj
e
c
t
sr
e
s
i
dei
na
r
e
a
s of immense coal reserves that have good upside
potential for CBM discovery, it is highly important for the company to delineate a reserve
estimate from the current gas in place estimate. Based on our r
e
vi
e
w oft
hec
ompany’
s
projects and our valuation model, we initiate coverage on CBM Asia Development
Corp. with a BUY rating and a fair value estimate of $0.58 per share.
Company
History
CBM Asia was founded on August 29, 2006, under the laws of British Columbia to
investigate and acquire coal bed methane rights in Indonesia. Effective August 12, 2008,
CBM Asia completed a reverse takeover of Infinity Alliance Ventures Inc, and is currently
trading on the TSX under the symbol “
TCF”
.
www.researchfrc.com
Large Coal Bed
Methane
Potential in
Indonesia
Page 3
According to Scott Stevens, of Advanced Resources International Inc., in his research
published in the Society of Petroleum Engineers (SPE) paper 88630, “
Indonesia: Coal bed
Methane Indicators and Basin Evaluation”
, October 2004 (Stevens et al), Indonesia has 12.7
trillion m3 or 450 Tcf of prospective CBM resources in place (ranked third after the U.S. and
China) within 11 onshore coal basins as shown in the picture below.
Source: Stevens et al
The study has identified CBM potential for all the coal basins. The following table shows
that the Kutai Basin, where the company is focused, is ranked third in terms of CBM
resource potential.
Source: Stevens et al
www.researchfrc.com
Page 4
We note these resource estimates are based on extensive surface and subsurface data
available for basic CBM parameters such as coal thickness, depth, rank, and other coal
properties derived from coal exploration coreholes, deep petroleum exploration well logs,
measured coal outcrop sections, and laboratory data. No significant CBM drill testing has
been done on these basins to derive these CBM resource estimates. Therefore, due to the lack
of detailed CBM specific data for reservoir properties, we note these estimates only delineate
potential CBM in place. Nonetheless, since vast amounts of proven coal reserves exist in
Indonesia, we believe the current operators of CBM projects have a good opportunity to
update the potential resources to the reserve category.
Recent ETTI
Study for the
Kutai Basin
A recent study by the Exploration Think Tank Indonesia (ETTI) in 2007, has identified 22.6
Tcf of potential CBM resources in a particular area of the Kutai Basin, where all of CBM
As
i
a
’
sc
ur
r
e
n
tpr
ope
r
t
i
e
sa
r
el
oc
a
t
e
d.Th
er
e
s
our
c
e
se
s
t
i
ma
t
e
sa
r
edi
s
t
r
i
b
ut
e
di
n16s
we
e
t
spots (sweet spots contains CBM potential and is defined as a sedimentary rock volume
which has coal seams at a target depth interval from 500 ft to 4000 ft, with a minimum
thickness of the individual coal seam of 3 ft). As shown in the image below, the value of
each sweet spot varies from 5 Bcf to 3.6 Tcf of gas in place. Please refer to Appendix A for
ETTI
’
sf
or
mul
af
ori
t
sCBM r
e
s
our
c
ec
a
l
c
ul
a
t
i
on
.
Source: ETTI, CBM Asia
Current Projects
CBM Asia holds two participation agreements to explore and develop CBM potential in the
oil and gas producing Kutai Basin, namely the Kutai block and the Sangatta block. The
company has also signed a PSC with the Indonesian government to develop and produce
CBM in a 760 km2 area, which encompasses a portion of the Kutai block.
www.researchfrc.com
Page 5
The original Kutai block covers 830.66 km2, and is in close proximity to a 30 km pipeline
that connects to the Bontang LNG Plant, providing direct access to international markets.
The company has expanded the area of the Kutai block by amending the original Kutai
participation agreement. Based on our discussion with management, other operators in the
area include BP Plc (NYSE: BP), which has concessions for coal bed methane to the
immediate east and adjacent to the Kutai block.
The Kutai
Block
Ownership: On January 17, 2007, CBM Asia entered into a participation agreement with
Ephindo-Ilthabi CBM Holding Inc. (PT Ephindo), and Far East Methane, LLC. Under the
terms of the Kutai Participation Agreement, CBM Asia has the right to earn up to 40%
working interest in their project area.
On April 18, 2008, the Kutai Participation Agreement was amended to include additional
areas in and about the Kutai Block held by a third party holder of coal contracts. The third
party acquired a 55% interest in the expanded block. CBM Asia holds the right to earn a
40% interest in the remaining 45% interest of the expanded area, or net 18% working interest
in the expanded area.
The Kutai West
PSC Area
On November 13, 2008, the Indonesian government awarded the company a Production
Sharing Contract (PSC) for the development and production of coal bed methane on an area
which covers a portion, and extends to the west of, t
h
ec
ompa
n
y
’
s Kutai block (the Kutai
West PSC). The government requires all companies engaged in the drilling or extraction of
CBM to sign a PSC. This is a v
e
r
yi
mpor
t
a
n
tmi
l
e
s
t
on
et
oa
c
h
i
e
v
et
h
ec
omp
a
n
y
’
sgoa
lof
becoming a CBM producer, and this PSC is the fourth time in history that the Indonesian
government has awarded PSCs for the development of CBM in the country.
The PSC covers a 760 km2 area, with the company holding 18% net working interest. The
PSC has been granted to Kutai West CBM Inc, a consortium established by the company and
its joint venture partners, and Newton Energy Capital Inc. Under the contract, Kutai West
and Newton have agreed to incur exploration expenditures of US$5.61 million over 3 years
including the drilling of 2 core holes and 4 exploration wells on the Kutai Block, in addition
to a payment of a US$1 million signing bonus to the Indonesian government. The
government retains 55% interest in the project after gas production is achieved. The
company retains the right to earn up to a 40% working interest in the remaining 565 km2 of
its Kutai Block, which is not covered in this PSC.
Estimates of
Gas in Place
The Kutai West PSC and the Kutai Block have an estimated total of 8.2 Tcf gas in place,
with the Kutai West PSC holding 5.1 Tcf and the Kutai block holding 3.1 Tcf. Note, as
shown in the following image, the Kutai block and Kutai West PSC block have an
overlapping area. According to management, the 3.1 Tcf represents GIP in the Kutai block
not covered by the Kutai West PSC area, whereas the 5.1 Tcf represents the entire PSC area
(i.e. the yellow area in the image).
www.researchfrc.com
Page 6
Source: CBM Asia
Source of Gas in Place Estimate: Indonesian authorities require an independent study for
CBM PSC applications. UPN (Universitas Pembangunan Nasional, an independent
University in Indonesia) estimates the CBM r
e
s
our
c
e
si
nt
h
ec
ompa
n
y
’
sKut
a
iWe
s
tPSC
area at 5.1 Tcf. According to management, the company has estimated the CBM resources
for the Kutai block, not covered by the Kutai West PSC area, at 3.1 Tcf. CBM As
i
a
’
sGIP
estimate for the Kutai block not covered by the Kutai West PSC area are based on the ETTI
study discussed earlier, and additional geological information assembled by the company.
Th
ef
ol
l
owi
n
gt
a
b
l
es
h
owst
h
ec
ompa
n
y
’
si
n
t
e
r
e
s
t
si
nt
h
eKut
a
ib
l
oc
ka
n
dt
h
eKut
a
iWe
s
t
PSC area at 0.97 Tcf, net of partners’and government take. Although the company has not
entered into any PSC in the Kutai block other than the overlapping area covered by the Kutai
West PSC, we have assumed the government will also take 55% in any PSC the company
signs in the Kutai block in the future.
GIP (Tcf)
Kutai West PSC
Kutai Block less Kutai West PSC Overlapping Area
Total
The Sangatta
Block
Net WI from
Partnership
Government's
Interest
18%
40%
55%
55%
5.1
3.1
8.2
Gas entitled to
CBM Asia (Tcf)
0.4131
0.558
0.9711
The Sangatta block is located just north of the Kutai Block, and covers approximately 12,000
km2. On May 26, 2008, CBM Asia entered into a participation agreement with PT Ephindo
to earn up to a 40% interest in their joint venture project in this block. Other operators in this
www.researchfrc.com
Page 7
block include Australian CBM specialist Arrow Energy (ASX: AOE), as Arrow recently
signed a preliminary agreement with PT Ephindo to farm into the Sangatta CBM block. In
January 2009, Arrow also spun off a 10% stake to Royal Dutch Shell Plc (NYSE: RDS.B) in
its overseas unit Arrow International, which includes interests in India, Vietnam, China, and
Indonesia. It was reported that Shell currently holds interests to work with state-owned PT
Pertamina to develop CBM fields in South Sumatra, Indonesia.
Removed
Potential
Dilution of
Ownership
from Coal
Contractors
Indonesian laws used to allow third party coal contractors to work in areas overlapping the
c
ompa
n
y
’
sKutai and Sangatta blocks. It gave coal contractors an equal right to explore and
develop CBM reserves in the overlapping areas, which means the contractors had the right to
earn up to 50% of the CBM project, di
l
ut
i
n
gt
h
ec
ompa
n
y
’
sown
e
r
s
h
i
pi
ni
t
sCBM
properties. In late 2008, the Indonesian government took coal contractors out of the
negotiation process for CBM projects, thus eliminating or reducing the risks of further
dilution in ownership from third party coal contractors. In addition, we think the time
involved in reaching a PSC with the government is also expected to decline as coal
contractors are not involved in the negotiation process.
Current Status
Based on our discussion with management, in the next 18 months, th
ec
ompa
n
y
’
sma
i
nfocus
is on the Kutai West PSC area, which includes work to delineate a 3P reserve estimate, drill
5 production pilot wells, and ultimately deliver produced CBM to the nearby Bontang
facility. Management has informed us that the company is also working on additional PSCs
on the Kutai block not covered in the Kutai West PSC. It is a
l
s
ot
h
ec
ompa
n
y
’
sob
j
e
c
t
i
v
et
o
continue to conduct geological and land position studies aimed at acquiring more prospective
acreage in the Kutai Basin. CBM Asia anticipates drilling to commence as soon as May
2009. According to management, gas customers of the Bontang facility are responsible for
the transportation fees f
r
om t
h
ec
ompa
n
y
’
sCBM f
i
e
l
dto the facility. Also, according to
management, the company does not have near term plans for its interest in the Sangatta
block, and is evaluating various options on these properties.
Excellent
Infrastructure:
Proximity to
the Bontang
Facility
The cost of CBM development and extraction is often higher than conventional natural gas
since it often requires stimulation and horizontal holes, and produces large amounts of water
with gas production (recovery of CBM is discussed later). However, the development cost
and the time to develop resources on CBM As
i
a
’
spr
oj
e
c
t
s could be reduced by the existing
infrastructure. Particularly, a large liquefied natural gas (LNG) plant, namely the Bontang
Facility (shown in the following picture), is i
nc
l
os
epr
ox
i
mi
t
yt
ot
h
ec
ompa
n
y
’
spr
ope
r
t
i
e
s
.
www.researchfrc.com
Page 8
Source: CBM Asia
The Bontang Plant was built in 1977 and is the largest LNG plant in the world. Importantly,
the Bontang LNG plant is connected by pipeline to, and only 30 km from the eastern edge of
t
h
ec
ompa
n
y
’
sKutai Block. The plant is currently about 0.5 Bcf/d short of total capacity in
light of declining LNG production in the past few years. We believe the Bontang Plant, and
the existing infrastructure such as roads and pipelines, have created many advantages for the
company such as significantly reduced development capital costs, existing customers and
ready markets for gas, as well as minimal environmental concerns as coal mining already
exist in the area. Some of the plant statistics are listed below.

Capacity 22.5 MMT/y LNG

2001 Peak Production 21.4 MMT/y

Over 227 MMT of gas has been supplied by the plant to markets in Japan, Korea and
Taiwan

Processed 3,700 MMcf/d natural gas in 2005

Unused capacity about 500 MMcf/d

Experienced a 10% production decline over the last five years

Operated by PT Badak NGL Company and 55% owned by PT Pertamina
Coal Bed
Methane
Primer
Coal bed methane is comprised mostly of methane, which is also the case for natural gas, it
is just derived from a different geologic situation referred to as Coalification. Coalification
is the process where plants are converted into coal by biological and geological forces.
Methane is formed at the same time as coal, and is stored in coal seams and the surrounding
strata, which are released during coal mining (conventional gases are found in rock
formations as opposed to coal beds). Deeper coal seams usually contain much larger
amounts of methane than shallow seams.
www.researchfrc.com
Page 9
According to the Energy Justice Network, coal beds have the ability to store 6 to 7 times
more gas than an equivalent volume of rock common to conventional gas reservoirs. The
amount of methane in a coal deposit depends on the quality and depth of the deposit.
CBM Recovery Process: Coal is a dual porosity system and the methane is stored in the
coal matrix. The fractures are usually water filled, and the water must be produced to reduce
the pressure in the fracture system so that the methane desorbs from the coal. This
combination of gas and water then flows to the production wells. Similar to the drilling of
conventional gas, coal bed methane can be recovered by drilling wells into the coal beds, and
water pressure in the coal seam can be reduced by pumping, allowing the gas to flow up
wells. CBM wells produce more water compared to conventional gas wells since coal beds
contain more fractures and pores. According to the Energy Justice Network, initial
production from a CBM well is primarily water, and gas production increases as coal beds
are dewatered. Time to achieve full scale production varies depending on the geological
conditions. The following graph shows a typical coal bed methane well.
Source: Energy Justice Network, Ecos Consulting
We believe stimulation and/or horizontal drilling will be required to develop the CBM fields
in the Kutai Basin and other areas of Indonesia. In light of the low rank of t
h
ec
oun
t
r
y
’
s
coals (coal geology is discussed later) which is usually associated with lower coal seam
permeability, CBM development in the Kutai Basin and Indonesia is likely to employ
stimulation techniques such as hydraulic fracturing (a common method used to create
fractures from a borehole into rock formations to increase flow rates of oil, gas or water),
and to a lesser degree, cavitations (water, air or foam pumped into a well to increase the
pressure in the reservoir spewing gas, water, coal and rock fragments out of the well). Based
on our discussion with management, the company intends to utilize directional drilling
techniques to explore and develop the fields. Horizontal directional drilling has been
employed for many CBM well completions in the US. Essentially, directional drilling is the
practice of drilling non-vertically to reach a target that is not directly beneath the drill site.
www.researchfrc.com
Page 10
This is desirable since the CBM prospective areas in Indonesia are often swampy and
remote, and costs of construction of roads to access the sites can be saved through directional
drilling. The U.S. Department of Energy indicates that horizontal directional drilling has the
benefit of increasing reserves and productivity.
I
na
ddi
t
i
on
,wet
h
i
n
kI
n
don
e
s
i
a
’
se
s
t
a
b
l
i
s
h
e
dpe
t
r
ol
e
um s
e
r
v
i
c
es
e
c
t
orwi
l
lb
ea
b
l
et
opr
oc
e
s
s
the expected high water pr
oduc
t
i
onf
r
omCBM we
l
l
s
.Someoft
h
ec
oun
t
r
y
’
sma
t
ur
eoi
lf
i
e
l
ds
have very high water cut, but are technically, and environmentally manageable. Water from
CBM production could be disposed of in I
n
don
e
s
i
a
’
sn
ume
r
oush
i
ghc
a
pa
c
i
t
yr
i
v
e
r
sa
n
d
streams after treatment, or into waterflooded oil fields.
CBM
Production and
Pricing
Production: CBM production is well advanced in the US, Canada and Australia. In contrast,
the CBM sector in Indonesia is still in its initial stage. The Indonesian government signed the
c
oun
t
r
y
’
sf
i
r
s
tc
oa
lb
ed methane PSC with PT Medco Energi International and its partner in
May 2008 (with the government taking a 55% interest). This project will develop a deposit
in the South Sumatra province. Medco predicts that the first commercial production of 5
MMcf per annum would commence in 2011, and increase by 10 times to 50 MMcf in six
years.
In general, CBM wells do not produce as much gas as conventional wells on a per well basis.
According to the Energy Justice Network, CBM wells produce between 100 and 500
Mcf/d/well in most regions of the US, while a conventional well in the lower 48 states
produces an average of about 1.7 MMcf/d/well. However, highly productive coal bed
methane areas such as the San Juan basin in Colorado, and New Mexico, have methane
production of up to 3 MMcf/d/well. In 2006, the San Juan basin, the most productive CBM
basin in the US, produced close to 900 Bcf of CBM (or over 400,000 boe/d), whereas the
total CBM production in the U.S. from 17 basins was 1,600 Bcf (or about 761,900 boe/d).
Gas Pricing: According to the OGJ (da
t
e
dJ
a
n
ua
r
y20,2009)
,I
n
don
e
s
i
a
’
sPTPe
r
t
a
mi
n
aa
n
d
PT Medco Energi International will sign a contract to supply natural gas from their jointly
owned gas field in Sulawesi to a LNG plant starting 2012 (the LNG plant is yet to be built).
The gas price under the contract is US$8/MMcf if the price of oil is $50/bbl, and
$12.50/MMcf if crude is at $120/bbl. We note this price for future gas delivery is
significantly higher than the current depressed gas price in North America. We think the
differential is due to the fact that gas pricing around the world is largely based on regional
fundamentals (supply and demand), i.e., prices vary from region to region because other than
a small amount of LNG, it is hard to arbitrage gas. At this time, we have a positive outlook
on long term gas demand in Indonesia (discussed in later sections), and believe the pricing
provided by PT Pertamina and Medco represents a good reference for the long term prices
CBM Asia could get from selling gas. However, in the short term, we believe the current
global economic crisis will put downward pressure on gas prices in Indonesia.
Coal Geology
in Indonesia
and the Kutai
Basin
Th
ec
ompa
n
y
’
sc
ur
r
e
n
tf
oc
usi
sont
h
eKut
a
iBa
s
i
n
,wh
i
c
hi
son
eoft
h
eb
e
s
tc
oa
lb
a
s
i
n
si
n
terms of CBM resource potential after only the South Sumatra and Barito basins. According
to Stevens et al. (discussed earlier), the entire basin has 80.4 Tcf of potential CBM resources,
and the primary CBM targets are the Lower Miocene Kamboja and the Mid-Miocene
www.researchfrc.com
Page 11
Prangat Formations of the Balikpapan Group. The formations have up to 50 m of net coal
dispersed amongst 10 coal seams.
Type of Coal Deposits and their CBM potential: The type of coal affects the CBM
resources it may contain. Generally, the deeper and higher ranked (i.e., higher energy value)
the coal, the more CBM in place. According to Steven et al., Indonesia has thick and low
rank coal deposits that are prospective for CBM development. Coal in Indonesia was formed
in tertiary back-arc rift basins that developed throughout southeast Asia. The islands of
Sumatra and Borneo (Borneo is in the Kalimantan province where CBM Asia operates)
a
c
c
oun
tf
ort
h
ema
j
or
i
t
yofI
n
don
e
s
i
a
’
sc
oa
la
n
dCBM pot
e
n
t
i
a
l
.Coa
lde
posits of two
primary ages occur with varied CBM reservoir settings:

Miocene Coals: The younger Miocene coals are regarded as more prospective. These
coals are relatively low in rank (from lignite to sub-bituminous), shallow (from outcrop
to 1,000 m), high in moisture (about 10%), and very low in ash content (less than 5%).
However theses coals are extremely thick, which typically comprises 10 to 20% of the
total formation thickness. A total of 20 to 30 individual coal seams with over 30m of net
coal exist in stratigraphicallly concentrated groups, which we believe presents attractive
CBM exploration potential.

Eocene Coals: Older coal deposits in Indonesia occur in the Eocene Tanjung Formation
and equivalents. These coals are low to moderate rank (sub-bituminous to bituminous),
deeper (1,000 m to 2,000 m), and thin to moderately thick (1-10m net coal). These
Eocene deposits are regarded to be less attractive for CBM compared to the Miocene
coals, due to their thinner and deeper characteristics (i.e. more expensive to extract).
Coal Geology in the Kutai Basin: The Kutai Basin is located in the major oil and gas
producing province of Eastern Kalimantan, which covers over 100,000 km2 and has known
gas-charged coal seams at an optimal depth of approximately 900m (or 3,000 ft) for CBM
extraction.
Acc
or
di
n
gt
oETTI
’
ss
t
udy
,t
h
ebasin was formed in Middle Eocene as rifted basin. It was
first filled by transgressive deposit of Eocene to Oligocene, and then by regressive deposit of
Mi
oc
e
n
e
.Th
e
r
ea
r
en
i
n
ec
oa
lb
e
a
r
i
n
gf
or
ma
t
i
on
si
nETTI
’
ss
t
udya
r
e
a
,where it identified
22.6 Tcf of CBM Potential as discussed above. The average coal rank in the study area is
sub-bituminous (a low rank coal used primarily in power generation, cement manufacturing
and other industrial uses, with energy content above lignite and below hard coal).
Overall, we believe CBM Asia’
sc
ur
r
e
n
tpr
oj
e
c
t
sa
n
df
oc
usarea, namely the Kutai Basin,
presents great upside potential for CBM considering the coal geology. As discussed, the
higher the energy value and deeper the coal bed, the more methane exist in the deposit.
Although the coal deposits in Indonesia and the Kutai Basin are largely low in rank, the vast
resource and thickness of the coal nonetheless present a good opportunity for CBM
exploration and further development. Currently, the resource estimates have not been
significantly drill tested, therefore, we believe it is important for the company to bring it to
the reserves category, which in our opinion, would confirm, and significantly increase the
c
ompa
n
y
’
sv
a
l
ue
.
www.researchfrc.com
Low Political
Risks for Oil
and Gas
Operators
Page 12
We think Indonesia represents relatively low risks for oil and gas companies, as it has largely
privatized its upstream sector, and several oil majors have operations in the country.
Privatization: The passage of Oil and Gas Law No. 22/2001 in October 2001, has reformed
I
n
don
e
s
i
a
’
soi
la
n
dga
s industry. The law mandated the state-owned oil and gas company
Pertamina to relinquish its role in granting new oil development licenses and limited the
c
ompa
n
y
’
s mon
opol
yi
n ups
t
r
e
a
m a
c
t
i
v
i
t
i
e
s
.Pe
r
t
a
mi
n
a
’
sr
e
gul
a
t
or
ya
n
d administrative
authorities were transferred to a new regulatory body, Badan Perlaksanaan Minyak Gas (BP
Migas). Pertamina was formed into a limited liability company, PT Pertamina, by
presidential decree in 2003, but remains a state-owned entity, and an important player in the
c
oun
t
r
y
’
soi
la
n
dga
ss
e
c
t
or
.
According to the Energy Information Association (EIA), several international oil majors
domi
n
a
t
et
h
ec
oun
t
r
y
’
soi
ls
e
c
t
or
,n
a
me
l
y Ch
e
v
r
on (
NYSE:CVX)
,BP (
NYSE:BP)
,
ConocoPhillips (NYSE: COP), ExxonMobil (NYSE: XOM), and Total (NYSE: TOT).
PetroChina (NYSE: PTR) and China National Offshore Oil Corporation (CNOOC) also have
ac
on
s
i
de
r
a
b
l
epr
e
s
e
n
c
ei
nt
h
ec
oun
t
r
y
’
soi
ls
e
c
t
or
.In the natural gas sector, Pertamina and a
few international companies, namely, Total (NYSE: TOT), ExxonMobil (NSYE: XOM),
Vico (a joint venture of BP and ENI (NYSE: E)), ConocoPhillips (NYSE: COP), and BP
(NYSE: BP) dominate production, whereas gas transmission and distribution are carried out
by the state-owned utility Perusahaan Gas Negara (PGN).
As for the downstream sector, Pertamina still maintains its retail and distribution monopoly
for petroleum products, which operates a
l
l8oft
h
ec
oun
t
r
y
’
sr
e
f
i
n
e
r
ies, although licenses for
retail sale of petroleum products were granted to BP and Petronas of Malaysia. The
Indonesian government is considering opening the sector to full competition, but slow
progress has been made so far.
Overall, we believe Indonesia presents low risk to oil and gas companies, including CBM
operators. However, we note that since CBM exploration is still in early stages, new
regulations could undermine the value of CBM companies (e.g., the government may decide
to take more interests in CBM projects). Currently, we think the government encourages the
development of CBM resources in light of its declining oil and LNG production, discussed
in detail in the next sections.
According to the Economist, the current president, Susilo Bambang Yudhoyono, is expected
to be re-elected in the second half of 2009. This is positive as he is in favour of foreign
investment. However, there are reports of growing opposition to foreign involvement in the
economy, particularly in the resources sector. In general the country is still risky to operate
in as the following table shows.
Indonesia: risk assessment: February 2009
Sovereign risk B
Currency risk B
Banking sector risk B
Political risk CCC
Economic structure risk BB
Source: Indonesia: Country risk summary
www.researchfrc.com
Well
Established
Energy
Industry
Supports CBM
Development
Page 13
The energy industry in Indonesia is well established both domestically and internationally.
The country quit as a member of the OPEC in 2008. It has been a net importer of oil since
2004, after production fell, and there was little success in finding new reserves. However, the
country still plays a very important role in the world natural gas and coal market. In late
2008, the country signed 33 contracts with oil and gas companies, which includes as much as
US$912 million in exploration budgets to be spent on oil and gas projects in 2009. At this
time, we think the declining oil and LNG production in Indonesia, coupled with the
gov
e
r
n
me
n
t
’
s intention to divert more gas to domestic consumption, provide great incentives
for the government to encourage development of other alternative energy supplies, such as
CBM. The infrastructure is also well established, which is good for companies who plan to
e
x
pl
or
et
h
ec
oun
t
r
y
’
sCBM resources.
Declining LNG Production for Exports and an Expected Increase in Domestic Gas
Consumption are Positive for the Development of CBM Projects: According to the EIA,
Indonesia, ranked 13th in the world with 93.9 Tcf of proved natural gas reserves. In 2006,
the country produced 2,613 Bcf of natural gas, and consumed only 1,399 Bcf. Importantly,
the country has been an established and credible supplier of LNG for more than 25 years,
and was the largest LNG exporter in 2005, supplying 23 million tons (or 1.1 Tcf) of LNG,
r
e
pr
e
s
e
n
t
i
n
g16% oft
h
ewor
l
d’
st
ot
a
l
.According to the US Embassy in Jakarta, over 50% of
t
h
ec
oun
t
r
y
’
sn
a
tural gas production was marketed as LNG or LPG (liquefied petroleum gas)
for export. In 2006, and 2007, Indonesia was t
h
ewor
l
d’
ssecond largest exporter after Qatar.
However, as shown in the table below, the country has experienced a declining trend in LNG
production and its global market share since 1998, with the depletion of traditional gas
reserves. Appendix B s
h
owst
h
ec
oun
t
r
y
’
sn
a
t
ur
a
lga
sr
e
s
e
r
v
e
s
,a
swe
l
la
sh
i
s
t
or
i
c
a
l
production versus consumption.
LNG Production in Indonesia
Volume
Revenues (billion
Year
(Million Tons)
US)
1998
26.912
3.389
1999
28.955
4.489
2000
26.991
6.802
2001
23.882
5.375
2002
26.225
5.595
2003
26.404
6.586
2004
25.504
7.767
2005
23.000
n/a
Source: US Embassy Jakarta, EIA
% GDP
3.4
3.2
4.4
3.8
3.2
3.1
3.1
n/a
World
Market
Share
32%
32%
26%
22%
23%
21%
n/a
16%
According to OGJ, in January 2009, the Indonesian government indicated a change of policy
to divert more gas production for domestic consumption as opposed to exports in the coming
years. This comes as domestic consumption is expected to continue rising with growth in
local industries and the burgeoni
n
gmi
ddl
ec
l
a
s
s
.BPMi
ga
s(
t
h
ec
oun
t
r
y
’
sups
t
r
e
a
m oi
la
n
d
gas regulator) estimates domestic demand for gas to increase at an average of 2.8% per year,
reaching 6 Bcf/d by 2020, from 4.2 Bcf/d in 2007. According to BPMigas, the country has
increased the proportion of gas for domestic consumption to 49.5% in 2008, up from 29.6%
www.researchfrc.com
Page 14
in 2002. The government has also indicated that gas companies might face difficulties in
meeting demand for exports, thus urging producers to maintain or increase their gas
production.
In addition, the country is equipped with good infrastructure, which we believe will benefit
CBM projects:

LNG produced from 3 terminals: the Bontang facility in Badak, East Kalimantan; the
Arun plant in North Sumatra; and the latest Tangguh LNG Project in Papua province

New LNG plants planned include a floating LNG plant in Indonesia's Timor Sea and the
Senoro LNG plant in Central Sulawesi

The country has over 3,100 miles of natural gas distribution and transmission lines from
nine regional networks. The state-owned utility Perusahaan Gas Negara (PGN) (the
operator) plans to build four additional domestic gas pipelines, named the Integrated Gas
Transportation System (IGTS), to improve connectivity, which is designed to eventually
link the islands of Sumatra, Java, and Kalimantan via a 2,600-mile pipeline. The planned
interconnection is partially complete, and is scheduled to be fully operational in 2010
with a capacity to transport 2.2 Bcf/d of natural gas (Source: EIA).
Declining Oil Production from Maturing Fields Encourages CBM Projects: According
to the EIA, Indonesia, ranked 25th in the world with 4.37 billion barrels of proved oil
reserves. However, production in Indonesia has been decreasing during the last 10 years due
to declining productionf
r
om t
h
ec
oun
t
r
y
’
sma
t
ur
i
n
goi
lf
i
e
l
ds(
s
uc
has on the two largest oil
fields Minas and Duri) and little success in finding new reserves. In contrast, consumption in
the country has increased in the past 10 years. The country has been a net exporter of oil
since 1980, but became a net importer in 2004. In 2007,t
h
ec
oun
t
r
y
’
spr
oduc
t
i
ona
n
d
consumption were estimated at 1.04 million bbl/d and 1.19 million bbl/d, with net imports of
0.15 million bbl/d. BPMigas estimates oil production at 0.96 million bbl/d in 2009 (note that
oil production is predicted to continue to decline), based on approximately $13.15 billion of
investment. BPMigas predicts only $201.57 million would be spent on new oil exploration
(Source: OGJ). Appendix C shows the country’
sr
e
s
e
r
v
e
s
, as well as historical production
versus consumption.
In light of declining oil production, BPMigas and the Indonesian government have already
i
n
t
r
oduc
e
d pol
i
c
i
e
sa
i
me
da
ti
n
c
r
e
a
s
i
n
gi
n
v
e
s
t
me
n
ti
nt
h
ec
oun
t
r
y
’
s ups
t
r
e
a
ms
e
c
t
or
,
including various incentive programs to develop marginal oil resources, and have waived
import taxes on capital goods for oil and natural gas exploration and production in October
2006.
To conclude, we think I
n
don
e
s
i
a
’
sa
ut
h
or
i
t
i
e
sa
r
elikely to encourage exploration and
development of CBM resources to offset the declining production from maturing oilfields,
depleting conventional gas reserves and LNG production; and meet the expected increase in
domestic gas demand. Support from the government is evidenced by observations that it is
currently taking only 55% interest in CBM projects as compared to up to 70% interest in
many conventional oil and gas projects. Shell (NYSE: RDS.B), BP (NYSE: BP), Total
(NYSE: TOT), Arrow (ASX: AOE) and Marathon (NYSE: MRO) are considering this
www.researchfrc.com
Page 15
sector, and dozens of proposals for CBM projects have been received by the energy ministry.
Immense Coal Reserves Underlines Large CBM Potential: I
n
don
e
s
i
a
’
sc
oa
lmi
n
i
n
g
sector produces primarily lignite or sub-bituminous coal from open-pit mines. According to
EIA estimates, Indonesia has 5.5 billion short tons of recoverable coal reserves (ranked 16th
in the world), of which, 85% is lignite and sub-bituminous. About two-thirds of the
c
oun
t
r
y
’
sc
oa
lr
e
s
e
r
v
e
sa
r
el
oc
a
t
e
di
nSuma
t
r
a
,wi
t
ht
h
eb
a
l
a
n
c
el
oc
a
t
e
d in Kalimantan, West
Java, and Sulawesi. In term of supply and demand, according to the World Coal Institute
(WCI), Indonesia is one of the world largest coal producers, and is estimated to have
produced 231 million tonnes in 2007. The country is ranked 7th in the world after China, the
US, India, Australia, South Africa and Russia. In contrast, consumption of coal in Indonesia
remains low compared to production, rendering the country one of the largest coal exporters
in the world. In 2007, Indonesia was the second largest coal exporter after Australia, having
exported an estimated 202 million tonnes of coal. Appendix D shows t
h
ec
oun
t
r
y
’
s coal
reserves, as well as production versus consumption since 2000.
The Indonesia government encourages t
h
ec
oun
t
r
y
’
sc
oa
li
n
dus
t
r
ya
n
dhave adopted a new
National Coal Policy in January 2004, which promotes t
h
ede
v
e
l
opme
n
toft
h
ec
oun
t
r
y
’
sc
oa
l
resources to meet domestic requirements and to increase coal exports in the long-run (In
2004, coal accounted for 13% of the c
oun
t
r
y
’
spr
i
ma
r
ye
n
e
r
gys
uppl
ya
f
t
e
roi
la
t31%,
combustibles at 27%, and natural gas at 19%, according to the WCI). At this time, we
b
e
l
i
e
v
eI
n
don
e
s
i
a
’
sc
oa
li
n
dus
t
r
yi
ss
t
i
l
ll
a
r
ge
l
ydr
i
v
e
nb
ye
x
por
t
s especially considering the
significant increase in coal prices in the past few years. In addition, coal is highly important
i
nI
n
don
e
s
i
a
’
se
l
e
c
t
r
i
c
i
t
yg
e
n
e
r
a
t
i
ons
e
c
t
or
.Ac
c
or
di
n
gt
othe WCI, in 2005, 75% the coal
consumed domestically in the country was used for producing electricity. Among all fuel
types, coal generated most of the electricity.
Overall, we think the immense coal reserves in Indonesia present a large CBM resource
potential. We note coal mining and CBM exploration and development may create potential
land rights conflicts. However, coal mining is usually shallow and goes to about 200 m from
surface, whereas CBM potential in the Kutai Basin is much deeper with the Miocene coal
going to 1,000 m from surface. This, we believe, will significantly reduce land right
conflicts.
Management
We think the company has excellent access to strong technical expertise in the Indonesian oil
and gas space from their relationships with partners in the oil and gas industry, as well as
with relevant government authorities. Brief biographies oft
h
ec
ompa
n
y
’
smanagement team
and board of directors, as provided by the company, are presented below
Alan T. Charuk, President & CEO, Director
Mr. Charuk served as Executive Vice President of Norwood Resources, and has led several
junior resource companies to discoveries internationally. In his position, Mr. Charuk shared
the benefit of his expertise in business development and securing financing for major
projects in the resource and hydrocarbon sectors.
www.researchfrc.com
Page 16
Clint Sharples, Chairman
Mr. Sharples is a partner in First Growth Management Inc. (FGM Inc.) with his main duties
being CEO of Paramount Pallet Inc., a senior executive and board member of Modu-loc
Fence Rentals and various positions on the public market side. FGM Inc. is a private venture
capital company with a focus on creating shareholder value by mid to long-term growth or
entity turnaround. Mr. Sharples has also served as President of IFCO Systems Canada. Prior
to this role, he was Vice President in various departments beginning in 1995. He sits on
various public and private boards including, Journey Resources (TSX-V: JNY), Infinity
Alliance Ventures, Thermal Energy International (TSX-V: TMG), the Canadian Pallet
Council and Arlo Resources.
Charles W. Bloomquist, VP Operations, Director
Mr. Bloomquist, a Registered Professional Engineer, has more than 30 years of experience in
the oil and gas industry. After graduating from the Colorado School of Mines, he began his
career with Tenneco Oil Company as a petroleum reservoir engineer working on projects in
the Williston and Powder River Basins. Thereafter, he worked as a consultant for Energy
Consulting Associates, then moved overseas to Indonesia as Project Manager for Basic Earth
Science Systems Indonesia, where he managed a team contracted to the national oil company
of Indonesia. He subsequently joined Intercomp in Denver Colorado where he was
responsible for building and managing a reserves and property evaluation business and
I
n
t
e
r
c
omp’
sRoc
kyMoun
t
a
i
n CO2 pr
oj
e
c
t
.In 1984, Mr. Bloomquist started Resource
Consulting International Inc. (RCI) in Denver and recently Far East Methane.
James Charuk, Director
Mr. Charuk, recently served as the Executive Vice President, Exploration, of Norwood
Resources, is a geologist with over 20 years experience with major multi-national
corporations in the area of oil and gas exploration. His expertise crosses continents and
disciplines; he has managed multi-disciplinary teams of geoscientists engaged in reservoir
i
de
n
t
i
f
i
c
a
t
i
onf
orWe
s
t
e
r
nAt
l
a
sI
n
t
e
r
n
a
t
i
on
a
l
.Mr
.Ch
a
r
uk i
mpl
e
me
n
t
e
dCh
e
v
r
onUSA’
s
wor
l
dwi
dedr
i
l
l
i
n
gt
e
c
h
n
ol
ogyc
e
n
t
r
e
’
smon
i
t
or
i
n
ga
n
dc
on
t
r
ol systems.
Brad Field, Director
Bradley Field, an entrepreneur and inventor turned executive officer, has over 25 years of
experience in the safety product industry. He was successful in turning the company he
founded, Pacific Safety Products Inc., into a producer of some of the finest quality safety
products in the world. Mr. Field was instrumental in taking Pacific Safety Products public in
1995. Mr. Field was also founder of Pacific Energy Products Inc., a manufacturer of
emergency and search and rescue medical equipment, and founder of Pacific Body Armour
Inc., a manufacturer of soft body armour protection for military, law enforcement and
paramedics. Over the years, Mr. Field has received numerous innovation and business
awards for his contribution in the safety product industry. Mr. Field remains on the Board of
Directors of Pacific Safety Products and is currently a director of the Cops for Kids
Foun
da
t
i
on
,RCMP,adi
r
e
c
t
orofKe
l
own
aWome
n
’
sSh
e
l
t
e
ra
n
dadi
r
e
c
t
oroft
h
eBr
a
n
c
h
Executive Committee forSt
.J
oh
n
’
sAmb
ul
a
n
c
e
.
www.researchfrc.com
Page 17
Dr. Harvey Price, Director , VP CBM Technologies
A leading expert on coal bed methane, Dr. Price has consulted with dozens of mines on their
de
ga
s
i
f
i
c
a
t
i
on pr
oj
e
c
t
s
.He h
e
l
pe
d de
v
e
l
op t
h
ef
i
r
s
tt
h
e
or
i
e
s on c
oa
lb
e
d me
t
h
a
n
e
’
s
commercial viability while Executive Vice President of Intercomp, an industry consulting
firm. Subsequently, as President of a subsidiary of Kaneb Services Inc., he managed the
wor
l
ds
’f
i
r
s
ts
i
mul
t
a
n
e
ousc
oa
lmi
n
ede
ga
s
i
f
i
c
a
t
i
ona
n
dme
t
h
a
n
epr
oduc
t
i
onv
e
n
t
ur
e
.The
project produced methane valued at over $300 million during its first 10 years of operation.
Dr. Price is an authority in utilizing computerized reservoir modeling and mapping
programs. Dr. Price began his career with Gulf Oil after graduating from Cornell University
wi
t
haBa
c
h
e
l
or
’
sDe
gr
e
ei
nEn
gi
n
e
e
r
i
n
gPh
y
s
i
c
s
,f
ol
l
owe
db
yaPh
.
D.i
nMa
t
h
e
ma
t
i
c
sf
r
om
Case Western Reserve University.
Financials
At the end of September 2008, the company had $4.30 million in cash (including short term
investments) and $4.31 million in working capital. The company posted a net loss of $0.76
million (EPS: -$0.02) for the first 9 months of 2008. We estimate the company had a burn
rate of $0.52 million per month for the first 9 months of 2008. The table below shows a
summary of the compa
n
y
’
sc
a
s
ha
n
dl
i
qui
di
t
ypos
i
t
i
onat the end of September 2008.
(in C$)
Cash + Short Term Investments
Working Capital
LT Debt/ Assets
Burn Rate (per month)
Cash Flows From Financings
2008 (9 mo)
4,302,241
4,310,660
(518,767)
4,711,724
In February 2009, the company received $1.04 million from its investment in Canadian asset
backed commercial paper, which was tied up since August 2007. The company had written
down the investment from $1.10 million to $0.60 million in FY2007. Therefore, we are
pleased to see the company has recovered the full amount from its investment. Subsequent to
Q3-2008, the company also raised $0.12 million from the exercise of warrants. We believe
the company is currently well funded to pursue its projects in the next 18 months.
Stock Options and Warrants: At the end of September 2008, the company had 2.98
million stock options with exercise prices ranging from $0.15 to $0.60, and expiry dates
between February 2012 and February 2017. The company also had 5.42 million warrants
outstanding with exercise prices ranging from US$0.15 to $0.90, and expiry dates between
February 2009 and August 2010 (Source: Management). In January 2009, the company
issued 1.87 million options with an exercise price of $0.28 and maturity date in January
2014. We estimate 1.09 million options and 0.74 million warrants are currently in the
money.
Conclusion: CBM Asia expects total costs of approximately $1.5 million for an exploratory
well (which covers costs associated with core sampling, permeability testing, and flow rate
testing, etc). This is more expensive compared to wells drilled in the development cycle.
Pursuant to the terms of the Kutai West PSC, the company expects to pay about one third of
the capital costs or $0.5 million per well, with its partners paying the balance. Overall, based
www.researchfrc.com
Page 18
on capital expenditures of $2.5 million to drill the 5 pilot production wells, we believe the
c
ompa
n
y
’
sc
ur
r
e
n
tc
a
s
h pos
i
t
i
on is sufficient to fund its working capital and capital
expenditures for the next 18 months.
Valuation
Since th
ec
ompa
n
y
’
sprojects are in very early stages, we have valued CBM Asia based on
the average ratio of enterprise value (EV) to resources of other coal bed methane companies.
Companies with CBM PSCs in Indonesia, such as PT Medco Energi International, are not
good comparables to CBM Asia since their primary assets are not in the CBM sector.
However, we have assembled CBM companies from Queensland, Australia and China,
whose primary assets are CBM projects (except for BPT that also holds other oil and
conventional gas projects). These companies are also in proximal international markets with
Indonesia, which we believe provide relatively good metrics on the current market valuation
of CBM projects. However, in our comparables analysis, some Australian companies are
much larger in size and have reserve estimates for their CBM projects, as compared to GIP
estimates for CBM Asia. We have accounted for this by discounting the EV/Resource ratios
of these companies to make them comparable to CBM Asia. Based on an average
EV/Resource ratio of $177 million/Tcf (or $1.06/boe), we have valued the company at
$0.58/share.
Comparables Valuation
Enterprise Value
Company
SYM
(Million C$)
1
Queensland Gas Company Ltd.
ASX: QGC
$4,688
Resource
Resource Category
(Tcf)
7.100
EV / Resources
(Million C$/Tcf)
Reserves
Reserves + Contingency
Resources
660.25
2
Beach Petroleum Ltd.
ASX: BPT
$908
1.637
3
Pure Energy Resources Ltd.
ASX: PES
$638
2.424
Reserves
263.15
4
Far East Energy Corp.
OTCBB: FEEC
$58
0.388
Gas in Place
149.20
5
CBM Asia Development Corp.
TSXV: TCF
$14
0.097
Gas in Place
145.81
6
Blue Energy Ltd.
ASX: BUL
$73
Gas in Place
34.26
2.128
554.87
$176.64
Average EV / Resource
Fair Value (C$/Share)
$0.58
* Queensland Gas' EV is based on the takeover price
* Enterprise values of BPT, BUL, and FEEC are based on the averge share price in the last 12 months
* EV of PES is based on the takeover offer price by BG
* EV of TCF is based on the average share price since August 2008 when it completed the RTO of Infinity Alliance Ventures Inc.
www.researchfrc.com
Page 19
Notes on comparable companies:
1.
2.
3.
4.
5.
6.
Conclusion &
Rating
Queensland Gas Company Ltd. –International gas major BG Group (LSE: BG)
recently acquired Queensland Gas (Australia-based CBM company) for A$5.75/share,
which valued the company at about A$5.6 billion. At the time of the offer, we believe
Queensland Gas had 3P gas reserves of 7.1 Tcf, which based on the offer, was valued at
$660 million/Tcf gas. However, Queensland Gas has operating assets, operates in
Queensland (where CBM production is well established and highly important to the
s
t
a
t
e
’
se
n
e
r
gys
e
c
t
or
)
,and was developing a LNG project at the time of the takeover.
We think these are also reflected in the takeover price. Hence, we have discounted its
ratio by 50% in our analysis.
Beach Petroleum Ltd. (ASX: BPT) – BPT holds substantial CBM assets in
Queensland relative to its oil and conventional gas assets. Resources used in our
analysis for BPT include 3P CBM reserves of 1.115 Tcf, and 2P reserves of 0.364 Tcf
ga
se
qui
v
a
l
e
n
tf
r
om t
h
ec
ompa
n
y
’
sot
h
e
ra
s
s
e
t
s
, and contingency resources in the
Cooper Basin of 0.157 Tcf (discounted by 90%). We have discounted EV/Reserve ratio
by 50% since BPT also operates in Queensland, has delineated reserve estimates
(compared to only GIP estimate for CBM Asia), and is producing.
Pure Energy Resource Ltd. (ASX: PES) – BG has announced a takeover offer price
of A$8.25/share. The independent directors of PES have recommended the shareholders
to accept the offer. We have discounted PES’
sEV/
3P Reserves by 50%.
CBM Asia Development Corp. (TSXV: TCF) –The company’
sc
ur
r
e
n
tGI
Pe
s
t
i
ma
t
e
of 0.97 Tcf (as discussed earlier) for the Kutai block and Kutai West PSC area is
discounted by 90% in our comparable analysis as they are not in the reserve category.
Fast East Energy Corp. (OTCBB: FEEC) –We have discounted their GIP estimate
by 90%.
Blue Energy Ltd. (ASX: BUL) –BUL is an Australian based company, which has
assembled a number of CBM properties in Queensland with a total GIP estimate of 21.3
Tcf. We have discounted this estimate by 90%. Also, since the company operates in
Queensland (which has large proved CBM reserves), we have discounted its EV/GIP
ratio by 25%.
We note that the market values reserve estimates significantly higher than GIP estimates.
Based on our analysis, we estimate that the market values 3P reserves at $492.8 million/Tcf,
compared to only $108 million/Tcf GIP. This indicates how important it is for CBM Asia to
upgrade its current GIP estimate to reserves.
Web
e
l
i
e
v
et
h
ec
ompa
n
y
’
scurrent projects represent good upside potential for coal bed
methane in light of the large coal deposits in its proje
c
ta
r
e
a
.CBM As
i
a
’
sprimary objective
to delineate a 3P reserve for its Kutai West block in 2009 through its pilot drilling program,
we believe, i
se
s
s
e
n
t
i
a
lt
oc
on
f
i
r
ma
n
di
n
c
r
e
a
s
et
h
ec
ompa
n
y
’
sv
a
l
ue
.Based on our review
of the company’
spr
oj
e
c
t
sand val
uat
i
on mode
l
,wei
ni
t
i
at
ec
ove
r
ageofCBM As
i
a
Development Corp. with a BUY rating and fair value estimate of $0.58 per share.
www.researchfrc.com
Risks
Page 20
The following risks, though not exhaustive, will cause our estimates to differ from actual
results:

The compa
n
y
’
spr
oj
e
c
t
sa
r
es
t
i
l
li
nv
e
r
ye
a
r
l
ys
t
a
ge
s. Despite having estimates for gas in
place, the company still needs to delineate a gas reserve estimate for its projects.

Development and production of CBM reserves incurs higher expenses than conventional
gas projects. However, we note that the established infrastructure in Indonesia may offset
some of the costs.
We rate the company a Risk of 5 (Highly Speculative).
www.researchfrc.com
Page 21
Appendix A: ETTI
’
sFor
mul
aForDeriving a Resource Estimate on its Study Area in
the Kutai Basin
ETTI employed the following formula to calculate CBM resources:
Ga
si
nPl
a
c
e(
G;un
i
ti
ns
c
f
)=1359.
7*A*h*% c
oa
l*ρB*Gc
;
Where:
A = drainage area, unit in acre
h = thickness of sedimentary rock at depth 500 –4000 feet, unit in ft
% coal = coal percentage in the sedimentary rock (coal seam recognition from petroleum
wells at the interval depth of 500 ft –4000 ft)
ρB=a
v
e
r
a
gec
oa
lb
ul
kde
n
s
i
t
y
,un
i
ti
ngr
a
m/c
m3
Gc = gas content, unit in scf / ton (here 150 scf / ton used as moderate value)
1359.7 = conversion factor, unit in ton* cm3 /acre*ft*scf*gram
www.researchfrc.com
Page 22
Appendix B: Natural Gas Reserves and Production vs Consumption in Indonesia
Proved Reserves:
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Source: EIA
Country
Russia
Iran
Qatar
Saudi Arabia
United Arab Emirates
United States
Nigeria
Venezuela
Algeria
Iraq
Kazakhstan
Turkmenistan
Indonesia
Malaysia
China
Natural Gas (Tcf)
1,680.000
948.200
905.300
253.107
214.400
211.085
183.990
166.260
159.000
111.940
100.000
100.000
93.900
83.000
80.000
Indonesia Natual Gas Production vs. Consumption, 1980 - 2006 (in Bcf)
3000
2500
2000
1500
1000
500
0
1980
1982
1984
1986
1988
1990
1992
Production
1994
1996
1998
2000
2002
2004
2006
Consumption
Source: EIA
www.researchfrc.com
Page 23
Appendix C: Oil Reserves and Production vs Consumption in Indonesia
Proved Oil Reserves
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Source: EIA
Country
Oil (Billion bbl)
Saudi Arabia
Canada
Iran
Iraq
Kuwait
United Arab Emirates
Venezuela
Russia
Libya
Nigeria
Kazakhstan
United States
China
Qatar
Algeria
Brazil
Mexico
Angola
Azerbaijan
Norway
India
Oman
Sudan
Ecuador
Indonesia
266.751
178.592
138.400
115.000
104.000
97.800
87.035
60.000
41.464
36.220
30.000
20.972
16.000
15.207
12.200
12.182
11.650
9.035
7.000
6.865
5.625
5.500
5.000
4.517
4.370
Indonesia Oil Supply vs Demand, 1980 - 2007 (in thousand bbl/d)
1800
1600
1400
1200
1000
800
600
400
200
0
1980
1983
1986
1989
1992
Production
1995
1998
2001
2004
2007
Consumption
Source: EIA
www.researchfrc.com
Page 24
Appendix D: Coal Reserves and Production vs Consumption in Indonesia
World Estimated Recoverable Coal (Million Tons)
Rank Country
1
United States
2
Russia
3
China
4
India
5
Australia
6
South Africa
7
Ukraine
8
Kazakhstan
9
Serbia and Montenegro (Yugoslavia)
10
Poland
11
Brazil
12
Germany
13
Colombia
14
Canada
15
Czech Republic
16
Indonesia
17
Turkey
18
Uzbekistan
19
Greece
20
Hungary
Source: EIA
Coal Supply and Demand in Indonesia (million tonnes)
1996
1997
1998
1999
Production
48.8
53.9
60.6
72.2
Consumption
10.9
13.2
15.4
19.0
Suplus
37.9
Source: World Coal Institute
40.7
45.2
53.2
Total Recoverable Coal
270,718
173,074
126,215
101,903
86,531
53,738
37,647
34,479
18,288
15,432
11,148
7,428
7,287
7,251
6,120
5,476
4,614
4,409
4,299
3,700
2000
75.6
22.1
2001
91.5
27.3
2002
102.5
29.2
2003
114.3
30.7
2004
132.4
37.1
2005
152.2
41.3
53.5
64.2
73.3
83.6
95.3
110.9
www.researchfrc.com
CAGR
13.5%
16.0%
Page 25
Fundamental Research Corp. Equity Rating Scale:
Buy –Annual expected rate of return exceeds 12% or the expected return is commensurate with risk
Hold –Annual expected rate of return is between 5% and 12%
Sell –Annual expected rate of return is below 5% or the expected return is not commensurate with risk
Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events.
Fundamental Research Corp. Risk Rating Scale:
1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry.
The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is
conservative with little or no debt.
2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive
to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash
flows (though current free cash flow may be negative due to capital investme
n
t
)
.Th
ec
o
mp
a
n
y
’
sc
a
p
i
t
a
ls
t
r
uc
t
ur
ei
sc
o
n
s
e
r
v
a
t
i
v
ewi
t
hl
i
t
t
l
et
omo
d
e
s
tus
eo
fd
e
b
t
.
3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive
to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and
coverage ratios are sufficient.
4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a
turnaround situation. These companies should be considered speculative.
5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products.
Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding.
These stocks are considered highly speculative.
Disclaimers and Disclosure
Th
eo
p
i
n
i
o
n
se
x
p
r
e
s
s
e
di
nt
h
i
sr
e
p
o
r
ta
r
et
h
et
r
ueo
p
i
n
i
o
n
so
ft
h
ea
n
a
l
y
s
ta
b
o
utt
h
i
sc
o
mp
a
n
ya
n
di
n
d
us
t
r
y
. An
y“
f
o
r
wa
r
dl
o
o
ki
n
gs
t
a
t
e
me
n
t
s
”a
r
eo
urb
e
s
te
s
t
i
ma
t
e
sa
n
d
opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness.
There is no guarantee that our forecasts will materialize. Actual results will likely vary. Th
ea
n
a
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y
s
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d
a
me
n
t
a
lRe
s
e
a
r
c
hCo
r
p
.“
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o
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to
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h
a
r
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s
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CBM Asia Development Corp.

Transcription

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