In initiating coverage with a 'speculative buy' rating and a NAV range of A$0.27 to A$0.58 per share for Elixir Energy Ltd (ASX:EXR, OTC:ELXPF), Taylor Collison says the company is on the cusp of defining the commercial proof-of-concept at Grandis Gas Project in the Taroom Trough in Queensland.
With drilling and preliminary testing results from the Daydream-2 well confirming the gas potential of the Bowen Basin deeps (tight gas) play, Taylor Collison’s research report said that Elixir was close to delivering definitive commercial gas flow rates.
READ: Elixir Energy readies to commence Daydream-2 stimulation and testing program
A longer duration evaluation campaign is underway and in a stronger gas price environment, the report said, “the economic threshold is relatively modest and we suggest achievable”.
First-mover position
“In this regard, EXR should be considered as holding a significant first-mover position.” The company is currently trading at A$0.11 and its market cap is approximately A$128.98 million.
Elixir was likely to transform from acquisition to commercial proof in two years which the report said was the opportunity awaiting the company with a return to testing at its Daydream-2 well seeking to demonstrate economic flow rates.
The report said a success case could underpin a material uplift in net asset value (NAV) and highlight EXR as a potential aggregation opportunity.
READ: Elixir Energy encouraged by high pressure at wellhead as Daydream-2 operations resume
In supporting its recommendations, Taylor Collison said Elixir had a potentially transformational gas resource with a gas zone (Lorelle Sandstone) not recognised as free-flowing in any wells previously drilled.
“Operationally, the Lorelle target may hold the potential to deliver threshold gas rates on a standalone basis and provide a relatively inexpensive and shorter timeline to first gas.”
Taylor Collison warned that next phase testing was not without risk and results still had to be delivered.
Re-rating potential
On success, it said that the company’s share price should increasingly reflect the intrinsic value of a gas resource that could potentially be considered to be in pre-development.
“At the current share price on attributable Grandis Project Contingent Resources (2C) of 1,276 Bcf, the stock is trading on a capitalisation reserves metric of $0.08/gj and that is cheap, reflecting the remaining risk overhangs.
“It is not unreasonable to suggest that a success rate re-rating could reprice the gas metric towards $0.29-0.45/gj represented by the pre-development/small-scale production opportunities at the upper end of the sector range,” the report said.
There were re-rating points on the horizon and the report said that the next six months would reveal much with testing results the key.
“Delivering the economic threshold opens up the commercial case and the path to growth begins with the first PJ. With flow rates come reserves and financing options.
“Holding the Grandis Project at 100% means EXR is in control of the pace of evaluation.”
READ: Elixir Energy working to address east coast gas crisis
Need for gas
Elixir’s potential was also supported by government studies now recognising the longer-term need for more gas and new gas supply.
“With the Federal Government acknowledging the need for more gas and a number of projects across the sector making progress towards development outcomes, it may be a case as to how long resource mis-pricing can persist.”
Taylor Collison’s report stated: “Early-stage plays are by definition speculative in nature but that is where the short-term value opportunity lies, in commercial proof of concept. Future testing could deliver a material derisking and re-rating outcome.
“We set our NAV range against probability weighted development outcomes benchmarked to market resource metrics, noting that as new data comes to hands our valuation assumptions can change materially. The share price currently represents a market risk weighting of ~72% to our mid-point valuation.”
It said that further Elixir success would open up the Permian tight gas play as a new and material source of gas, measuring in the Tcfs, in an extensive infrastructure hub at a time the Federal Government has declared that "new sources of gas supply are needed to meet demand during the economy-wide transition".