Lakes Blue Energy NL: The Proof Is in the Drilling

Scope of this report
This report has been commissioned by Lakes Blue Energy NL to present investors with an analysis of the opportunities emerging for the company over 2022. Due to the early-phase nature of the portfolio, investors should consider this a high-risk investment.

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. Although the company has been suspended from trading since October 2019, tangible progress has been made across the portfolio with a commercial discovery (industrial CO2) at Nangwarry, the imminent commencement of drilling at Wellesley-2 and with the lifting of Victorian exploration moratorium (as of 1-Jul-2020), the potential for drilling evaluation on its Wombat Gas Project. We suggest the success cases at Wellesley and Wombat could be commercialised quite rapidly.

Scenario analysis
We have evaluated the LKO portfolio against a range of risk factors based on our assessment of the operating environment, commodity prices, timing and scale of work programmes; and potential timeline to development and financing. Our assumptions are subject to potentially significant adjustment as definitive drilling results come to hand. We highlight the changes in the industry over the past 24 months with the emergence and acceleration of renewable energy options and increased development risks for traditional energy sources. However, we are confident natural gas will continue to be a required energy option through and perhaps well beyond a reasonable investment window.

Valuation of $206mn (0.5cps) at the mid-point
Valuing early-phase exploration assets is a subjective exercise, particularly when work programmes and financing are uncertain. We base our valuation on typical unit NPV values across a range of pricing scenarios and resources estimates, applying discretionary weightings to pricing, volume and success factors. We assign a base-case (mid-point) valuation of $206mn (0.5cps) to LKO, with an upside case to $337mn (0.8cps). Assuming a relisting reference share price (0.1cps) would suggest the market is appropriately weighting the asset base for the current operational and corporate risks. We note the success cases for Wellesley-2 and (particularly) the Wombat Gas Project 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.