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Georgina Energy - upcoming IPO

Georgina Energy - upcoming IPO
Rare opportunity in helium

Georgina Energy is an energy company offering investors exposure to an increasingly supply-constrained commodity - helium.

Helium is an important industrial gas with applications in medical, industrial and technology industries (details on p2). There is a limited global supply of helium, with growing demand and no direct substitute available. The imbalance of supply and demand is becoming increasingly evident in market terms, with the most recent global helium auction showing a 135% increase year on year, and the US government placing restrictions on exports to conserves supplies for domestic use. More detail on the market p2-4.

Georgina Energy is acquiring the licence on a major project in the Northern Territory, Australia, with significant helium potential. The company will seek to raise up to £10m, and has already secured over £2m with strong expressions of interest for the balance.

The EP127 Georgina Project

The EP127 Georgina Project in the Southern Georgina Basin, consists of 4 million acres with 10 wells drilled variously from 1988 to 2014. An independently produced Competent Persons report has identified the required elements to yield significant helium accumulations within the permit. Significant factors include:

• Geological structure analogous to the Amadeus Basin that lies further south, which has high levels of helium present.

• Potential to host up to 138 BCFG, at high concentrations - possible 6% helium.

• The presence of uranium, which is a key predicator for helium deposits. Previous wells were drilled for potential natural gas, and until recent years it was not routine practice to test for helium. These existing wells offer a cost effective route of Georgina Energy to begin new evaluations.

The property is suitably located for road transportation of partially refined helium, which could be delivered, for example, to existing facilities in Darwin which are currently under-utilised.

Value to shareholders

It is too early to produce a definitive valuation of the helium opportunity at EP127. However, we can scope the potential as follows:

• Georgina Energy has an initial target of 29.7BCF of helium. Delivered over 16 years, at the current spot price of 28 US cents, then this would represent US $0.5bn of revenue per year.

• Assuming a 55% net profit margin (70% gross margin, minus 3% royalty, minus UK corporate tax), and a discount rate of 10%, this gives a net present value of US$2.1bn.

This could represent substantial upside for shareholders, even without any further squeeze higher in the helium price. The company plans an application to list on the LSE standard segment by 30th September, with an offer price of 20p.

 

 

 

High tech, fast growing applications across diverse industries

 

 

 

Helium applications
 
Source: US Geological Survey

Helium is therefore an important industrial gas, and is difficult/impossible to substitute in many applications.

However, global supply of helium is limited, and some of the major existing supply sources are becoming depleted. Evidence of a supply squeeze includes:

  • The most recent global auction of helium set a price of 28 cents per cubic foot, an increase of 135% over the previous year.
  • The US government has imposed a blanket restriction on the export of helium, to conserve supplies for domestic use. The US is the world's biggest producer.
  • The American Medical Association has proposed that the US government should go further, by restricting the use of helium by application even within the domestic market, to protect medical applications.

The following chart shows the growing imbalance of global supply versus demand for helium, according to the US Geological Survey.

Current sources of supply systemically unable to keep up with demand

Helium - supply versus demand
 
Source: US Geological Survey

There is no obvious solution for finding a major additional source of helium.

The following chart shows the current production of helium by geography.

Helium production by geography
 
Source: Helium One

Qatar unable to raise production, USA experiencing depletion

Qatar produces helium as a by-product, from very low concentrations within natural gas. There is no way of 'squeezing out' more helium from these sources. The position is similar for Algeria and Russia.

The USA, by contrast has some sources of more highly concentrated helium (>3%) which can be exploited specifically as helium projects. However, these are the exact sources which are becoming depleted in the US Geological Survey projections.

The following chart shows the price of helium, as measured by the US Bureau of Land Management annual auction process, which is the only real benchmark for helium pricing.

Helium price
 
Source: US Bureau of Land Management data

Drivers of the supply squeeze remain in place

This has been on an upward trend for a decade. More recently the price has spiked significantly. We attribute this recent price action to:

  1. Diminishing incremental supply from the US
  2. Demand growth from high-tech applications, especially medical
  3. Some degree of risk premium around Qatari supply, based on geopolitical tensions

We believe that an overall upward price trend is a reasonable expectation for the next decade.

Where does Georgina Energy fit into the helium market?

Helium extraction projects fall into two categories (and a spectrum of projects in between):

  • Predominantly natural gas plays, with helium as a by-product, occurring at concentrations of 0.3% of less
  • Helium plays, with helium concentration 3.0% of higher.

The following diagram shows some of the major helium projects globally.

Selected major helium projects
 
Source: Georgina Energy commissioned report

Based on Georgina Energy’s initial target of 29.7 BCF of helium, taken from concentrations perhaps as high as 6%, the diagram shows that the EP127 project could potentially become a globally significant producer of helium.

 


The EP127 Project

 

Georgina Energy has reached an agreement to acquire licence on the EP127 Georgina Project, in the Southern Georgina Basin, Northern Territories, Australia. More details of the acquisition on p8.

The licence covers a 4 million acre site with 10 wells drilled various from 1998 to 2014. These were drilled as pure oil & gas prospects, which did not prove economical for the producers concerned. At that time, testing for helium was not routine practice in the oil & gas industry, but with the helium price now at much higher levels it becomes interesting to develop EP127 as a primarily helium play, with oil & gas upside.

There are a number of reasons to consider EP127 as a potential helium source, in particular the geological similarities between the Georgina Basin and the neighbouring Amadeus basin which is already being developed for helium.

We start with an overview of the formation of helium in the earth’s crust. This occurs predominantly via the radioactive decay of elements such as uranium. Helium itself is not radioactive and cannot become radioactive. If an impervious “sealing” layer exists above the uranium, usually a layer of salt, then helium can collect within gas deposits beneath this salt layer. The following diagram illustrates.

Formation of helium gas deposits
 
Source: Proactive Research

 

 

EP127 has important geological features in common with the nearby helium-bearing Amadeus Basin

 

 

Similarities between Georgina Basin and Amadeus basin

The Amadeus Basin is a geological formation lying to the south of the Georgina Basin. Within the Amadeus basin, helium concentrations of 5.8-6.2% have been identified in natural gas extracted, and these resources are being assessed for development within projects operated by Santos Oil and Central Petroleum.

Specifically, the helium that has been found in the Amadeus Basin has been identified as being radiogenic (formed by the process shown in the diagram above). The Georgina Basin has numerous geological similarities with the Amadeus Basin, some of which are laid out in a competent persons’ report commissioned by Georgina Energy – “Understanding the potential for recoverable hydrocarbons and helium with reference to exploration permit 127 (NT), by Geol. John Heugh and Dr. Michael C. Clarke”. In particular, the Georgina Basin exhibits a presence of uranium and a sealing layer of salt.

Commercialisation

The EP127 property lies in a remote region of the Northern Territory, but lies within range of some important infrastructure. The following map shows the immediate infrastructure.

Location of EP127 - proximity to infrastructure
 
Source: Georgina Energy commissioned report

Good geographic location - infrastructure, labour, supportive state government

A potential roadmap for commercialisation is laid out in the competent persons’ report. In summary:

  • Helium would be refined in a gas separation plant on site, to a grade of perhaps 70-80%. This requires relatively modest onsite infrastructure, and we believe that this could potentially be financed by the customer in any off-take agreement.
  • This partially refined helium can they be trucked by road to its final refinery. We note that there is an existing refinery for helium in the city of Darwin, which is currently underutilised, and can be reached by the Stuart Highway.

In the case of a modest to medium sized gas reserve, the natural gas separated from the helium would be used for onsite power generation. In a larger find, natural gas would be sold into the market, which could be achieved, for example, by a connection to the NEGI pipeline.

The Northern Territory is an advantageous location for other reasons:

  • Local availability of specialised labour
  • Local presence of underutilised or unutilised equipment
  • Potential to benefit from development incentives from the state government.

IPO - background and objectives

Georgina Energy has in place an agreement to acquire the licence to the EP127 project from Global Vanadium Ltd.

Georgina Energy will seek to raise capital via and IPO, listing on the LSE main board. The IPO will target a minimum capital raise of £5.0m. Of this A$0.5m (£0.3m) in cash will be used to complete the acquisition of EP127, with the remainder to be used to develop the project.

Our understanding is that £1.5m will be used during the first 12 months, with works to include bringing the first helium to the surface. We note that this represents a small capital investment compared with drilling on a ‘virgin’ site, but in the case of EP127 Georgina Energy can utilise existing wellheads from the earlier drilling projects on the property.

We believe that customer expressions of intent or even fully defined offtake agreements could be in place 12 months after the capital raise.

The following diagram shows a timeline for the project through to full commercial production, based on the minimum capital raise of £5m. In the event that £10m is raised through the IPO process, then the development process would be accelerated.

Timeline
 
Source: Georgina Energy

Potential value

It is too early to produce a definitive valuation of the helium opportunity at EP127. However, there are a number of useful datapoints we can use as a framework:

  • Georgina Energy initial target of 29.7 BCF helium
  • Latest helium auction price US$280 per MCF
  • We believe Georgina Energy could achieve an extraction cost of US$80 per MCF

If we assume that the 29.7 BCF were extracted over a period of 16 years, then we arrive at the following annual calculation for net profit (or cash profit).

High level of profitability, achievable possibly 18 months after IPO

Annual cash profit
 
Source: Proactive Research

If we assume that commercial extraction begins 18 months after the IPO (applying the accelerated development path), and generating a 16 year discounted cashflow from that point in time, with a discount rate of 10%, we would arrive at a Net Present Value of US$2.0bn. The following table shows the sensitivity of this NPV calculation to changes in discount rate or helium price.

Net Present Value of helium deposits could be US$2bn or greater

NPV of helium resource at EP127, US$bn
 
Source: Proactive Research

These figures do not take into account the additional potential for hydrocarbon extraction (oil and gas) which is also a potential source of additional value.

Conclusion

We believe that Georgina Energy offers investors a unique opportunity to gain exposure to the helium supply squeeze. The business plan offers strong profitability, modest capital requirement, and a fast transition to positive cashflow.

We argue that investors who enter at the IPO stage stand to benefit from substantial valuation upside if commercial volumes of helium are confirmed.

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Georgina Energy - Proactive Oil Capital conference

Proactive Research analyst Ed Stacey discusses Georgina Energy at the recent Proactive Oil Capital conference. The company is in the process of acquiring the licence on a major project in the Northern Territory, Australia, with substantial helium potential. They're also seeking to raise up...

1 week, 6 days ago

12 min read