Kinetiko Energy Ltd (ASX:KKO)’s valuation has been upgraded by K1 Capital to $0.36/share (prev. $0.32) as the company continues to make significant progress on multiple fronts.
K1 noted that progress at Kinetiko is accelerating, with the acquisition of Badimo Gas, identification of new gas targets, drilling of three new wells, execution of a gas sales agreement with Vutomi Energy, announcement of joint development agreement with major South African financial institution, IDC, to develop gas fields for domestic offtake and introduction of strategic investor Phefo Power.
Gas sales are expected to commence shortly, followed by a 10-20 well pilot, delivering ~1-2 TJ/d by 2024.
A successful demonstration should lead to staged project expansion to 100+ TJ/d later this decade.
K1 has valued KKO at $0.36 per share with an upside to $0.90+ per share on de-risking.
The following is an extract from K1’s research note:
Background: Kinetiko is a gas exploration company targeting South Africa’s growing unmet energy demand, with 4.9 tcf of 2C contingent resources with further exploration potential, close to industrial centres & power generation.
Afro Energy acquisition concluded, converting Badimo Gas’ 51% interest in the CBM exploration permits to a ~46% interest in Kinetiko, simplifying the previous JV decision process and funding of exploration and development.
Aeromag expands exploration targets: Kinetiko’s third survey, covering ~560 km2 over ER 270 and ER 272, increased the surveyed area to over 800 km2 and more than doubled identified gas exploration targets to 79.
Three new exploration wells drilled: Korhaan-3, 4 & 5 were drilled adjacent to two existing wells, with all flowing gas to surface. The five well pod will support near term gas sales, with approval for 500 MMscf/yr (1.4 MMscfd).
First gas offtake agreement executed: The GSA with Vutomi Energy covers gas sales to produce electricity (1 MW -> 5 MW) for third party customers.
IDC JDA: IDC will contribute ZAR70m ($6m) for 45% of an incorporated JV towards a production pilot of up to 20 wells, with KKO raising $3.1m via a 1:15 rights issue @ $0.075 to fund its share. Successful demonstration could lead to a larger staged program ultimately delivering 100+ TJ/d. Discussions are underway with other domestic and international funding groups.
Value proposition: Low drilling costs (~$US0.35m/well) and high gas prices (~$US7/MMBtu) provide attractive economics, with an estimated IRR of over 30%. Operatorship and high equity interest provide options for staged farm-down to fund future development and monetize resources in advance of gas sales. Kinetiko is trading at a discount to ASX-listed CBM peers.
Price catalysts: Commencement of multi-well pilot; resource upgrades and maiden reserves; confirmation of well performance parameters; further gas sales agreements; further exploration outcomes, production increases.
Risks: Project schedule delays; resource repeatability over the project area; ongoing funding; immature domgas and independent power sectors; gas pricing; competition from large offshore gas discoveries, civil unrest.
Next steps: Commence initial gas sales (2H 2022), 10-20 well IDC pilot (2H 2022); reserves assessment (2H 2022); progress gas commercialization options (2022/23); FID on larger development (2024+).