Market

Gas Bull Market Stock Watch

Gas Bull Market Stock Watch

Yesterday, we touched on the idea that the world is being hit on the energy front and the pounding won’t stop anytime soon. That makes looking at energy stocks a must.

But we’re talking about big markets here across multiple sectors. There’s oil, coal, uranium, and natural gas.

Some companies have exposure to more than one, and often projects in different countries too.

One gas company I’ve been keeping my eye on is Cooper Energy Ltd [ASX:COE]. It’s recently shifted from developer to producer with its main gas assets off the coast of Victoria.

That’s a handy place to have your base because Victoria consumes the most gas by far in Australia. That’s a legacy of having lots of its natural gas in the Bass Strait.

Cooper’s share price has been hammered in the last few years. Take a look…

You can see a little spike in the bottom left corner just as the energy crisis began to hit the headlines and wash across the market.

Sometimes it’s easy to extrapolate a bull market in anything (in this case, gas) to a buying rationale for any stock in the sector.

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However, I am not buying Cooper and don’t suggest you do. By all means, keep an eye on it, but let me explain why.

Cooper’s flagship project is the big gas field called Sole in the Gippsland Basin. They have spent hundreds of millions to bring it into production over nearly a decade.

Like all big projects, it demanded lots of debt and equity and big time frames to come to fruition. Management had done a good job to make it happen.

But right at the finish line Cooper have run into a problem. The gas processing plant they use (but don’t own) ran into a persistent fouling issue.

That’s kept the amount of gas they can get to market lower than it otherwise should be and made it tricky for them to deliver into their contracts.

The other catch is that Cooper delivers into these gas contracts at an agreed price, not spot ones, mainly with the energy retailing sector.

This price is not the big juicy one we are reading about when it comes to spiking LNG prices around the world.

The bull case for Cooper is one step removed from this dynamic. The idea is that the high international LNG price will draw Queensland gas to ship overseas and away from Victoria, and therefore push up gas prices in southeastern Australia.

And that may happen. But Cooper told the market in a recent update that its selling price for gas remains in the expected range it was previously.

I went over Cooper’s accounts yesterday. While revenue lifted in FY21, the company’s cash flow was negative, and it ran at a loss after all costs and capital spending was accounted for.

It also carries $100 million in debt from financing the development of the Sole field.

Now, it might be that the market is now prepared to look beyond the problems at the processing plant and red accounts. The jump in the stock price might suggest so.

However, I remain wary. I’ve always found the company presentations a bit hazy on what its cost base is getting that gas out of the ground.

It’s hard to get a grip on potential earnings, at least for me. Plus, the company is still spending money on development and relying on a third party to resolve the plant issue.

That leaves it in a weaker position than a gas stock that can mint money at the high prices happening elsewhere.

What about the recent jump in price? That could be bargain hunters, or the start of a new uptrend forming. A case can be made for Victoria’s gas problem to worsen from now to 2025, so perhaps there are those with a longer time frame in mind too.

The stock is in the top 10 of stocks short sold too, however, so I wonder if they are getting out now (and buying back stock to get out).

Feel free to touch base with me at letters@dailyreckoning.com.au if you think I’m wrong, right, or somewhere in the middle. Perhaps you have an energy stock you’re pumped about? Feel free to share it, too.

For today, I’m not looking to acquire Cooper. But I’ll keep tabs on its progress.

Oh, I mustn’t forget something else. I’m the host of our new market podcast, The Fat Tail Investment Podcast. Every week I’ll bring you ASX updates, trade ideas, and special guests.

I’m pumped to bring you a great show. We are starting with a bang — my old mate Murray Dawes joined me for our first hit out.

He shares why he’s got a worried eye on what’s happening on the ASX — and what you can do about it.

Click here or the thumbnail below to check it out:

Fat Tail Investment Research

Regards,

Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia

PS: Our publication The Daily Reckoning is a fantastic place to start your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.

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