Stock of the Week MEO Australia (MEO)

MEO Australia is focused on developing material gas processing projects in provinces with established liquefied natural gas (LNG) infrastructure.

The company is involved in three main projects, namely The Tassie Shoal Methanol Project, Timor Sea LNG Project, and the NT/P68 exploration permit located in the Money Shoal Basin.

Its Artemis prospect could contain up to 12 trillion cubic feet of gas which would be more than enough to support a stand-alone LNG export project.

MEO boasts a development proposal in place for a three million tonne per annum (Mtpa) LNG plant and two 1.75 Mtpa methanol plans in the Timor Sea, offshore Northern Territory.

The Bonaparte and Carnarvon Basins are both proven gas princes with established LNG infrastructure.

Following a fairly large investment, international energy giant Petrobras is now a major participant in the Carnavon Basin which adds to the credibility of the region.

Gas gas gas

Australia is fast becoming one of the world’s pinnacle gas players. In particular, the North West Shelf is known to be Australia’s gas rich region.

Over the past few years, we have seen an influx of investment in our local gas producers by some of the world’s biggest energy companies.

The likes of Shell, Petronas and BG Gas are already heavily invested in Australia as the rush for energy heats up.

Strong economic growth in developing and highly populated countries like China and India has seen the world’s energy demands surge.

Additionally, cleaner sources of energy have been a hot topic and LNG is believed to be one of the cleanest energy sources available.

Sustained demand for energy from fast-growing Asian economies is likely to see LNG demand continue to rocket.

A strong recovery in energy prices from the depths of the global financial crisis is a huge boost for MEO, and as a result, it has been one of the hot stocks in recent months.

Crude oil prices are surging on the back of a weaker US dollar and a strong recovery in economic conditions.

Petrobras interest

MEO is looking to partner up with large global companies seeking to grow quickly and work together to grow its portfolio.

In April this year, Petrobras agreed to pay up to US$80 million to take a 50% stake in an exploration permit offshore WA.

The deal essentially saw Petrobras partnering MEO in the permit WA-360-P.

Petrobras gained a foothold in the fast developing Australian gas market whilst MEO is rewarded through cash payments.

MEO recently received a US$39 million cash consideration from Petrobras in relation to the WA-360-P farm in.

The deal with Petrobras helps MEO fund most of its drilling costs in its first well.

Successfull discovery will see Petrobras pay for two follow-up wells to a cap of US$62 million and another US$31.5 million cash to MEO in January 2011.

Looking ahead

MEO has managed to continually increase its exploration area through further permit acquisitions.

Although the company continues to invest in lucrative exploration opportunities, it has managed to preserve its cash well.

As at 30 September, its consolidated cash balance was $36.8 million. This excludes a US$39 million cash consideration received from Petrobras in October.

A lot of MEO’s success will be dependant on how the drilling activities progress making it a highly speculative play.

However, the fact that MEO is drilling in some highly lucrative regions and has most of its drilling costs funded through strategic alliances reduces the downside risk.

What sets MEO apart from other prospective gas players out there is its proximity to established infrastructure.

Further upside will likely come from surging oil and gas prices and new venture opportunities, meaning MEO will be one of the stocks to watch in coming months.

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