Lakes Blue Energy NL - Enterprise North Upgraded and Reset
Lakes Blue Energy NL (ASX:LKO) is a junior energy explorer with assets across southern and eastern Australia (and PNG). The company has been listed on the ASX since December 1985. After recapitalisation and relisting the company has returned to exploration with the high-graded Enterprise North prospect set for drilling in Q2 ’23 and securing a partnering deal to commence activity in PNG. In the short-term, the success case at Enterprise North has the capacity to materially change the structure and value base of the company. A material gas discovery could be monetised relatively rapidly through a low capital cost development option or asset transaction, we suggest. We see a strong continuing role for gas in the energy transition and highlight the increasingly favourable operating environment. Crystallising the inherent value is dependent on successful drilling outcomes and the company’s capacity to continue to secure financing, but certainly the opportunity set looks attractive with a number of potential event drivers over the next 12 months.
Business model
Lakes Blue Energy is a junior energy company holding extensive acreage across three Australian states (and PNG), dominantly focussed on exploring for gas. The company holds a portfolio of exploration assets and a pre-development, commercial discovery (industrial CO2) at Nangwarry. Recent evaluation works have high-graded the Enterprise North Prospect in the Otway Basin, with the nearby Enterprise gas discovery pointing to the look-through potential as an analogue model. Approvals applications have been submitted for the drilling of Enterprise North in 2023. The success case could be material and commercialised quite rapidly.
Enterprise North set for drilling
The PEP 169 JV in the onshore Otway Basin (LKO 49%) has high-graded the Enterprise North Prospect based on 3D seismic and tie backs to analogue gas discoveries. The look-through analyses point to a high-quality and material gas opportunity, perhaps around 150PJ with a very high probability-of-success rating estimated at 72%. Historical success rates on exploration drilling in the region based on 3D seismic are >90%...Enterprise North ticks the boxes and is set for drilling in Q2 ’23. Confidence levels should be high given the success at the Beach Energy well (Enterprise-1) only 3km distant, but as with all exploration, the proof will be in the drilling result. The success case could be transformational as the most valuable asset in the sector today is uncontracted gas with low capital and operating costs.
Valuation of $286m (0.6cps) at the mid-point
Valuing early-phase exploration assets is a subjective exercise, particularly when financing and the timing of work programmes are uncertain. Against an exploration portfolio, we assign values holistically, breaking out specific prospects and assets where sufficient detail is available...in this case expanding the value considerations over the Enterprise North Prospect. We value the prospect against risked transaction metrics at $54-162mn on success, which underpins a rise in the carrying value across the portfolio. We assign a base case (mid-point) valuation of $286m (0.6cps) to LKO, with an upside case to $468m (1.0cps). Against a reference share price (0.1cps) would suggest the market is appropriately weighting the asset base for the current operational and corporate risks but note the success cases for Enterprise North would result in a material unwinding of risk weightings and reset of the economic base cases, delivering potentially transformative upside, likely well in excess of our valuation range...such is the nature and attraction of exploration plays.
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- Lakes Blue Energy NL - Enterprise North Upgraded and Reset01 Nov 2022