Nexus Energy (ASX:NXS) is small cap emerging oil and gas producer, with operations focused on the Gippsland Basin, offshore Victoria and the Browse Basin, offshore Western Australia.
In 2009, NXS transitioned from explorer to producer with the start-up of the Longtom gas project.
The Longtom project was plagued by production problems in late 2010 due to the detection of mercury in its gas. However those issues have since been resolved and the project has been delivering record production of late.
A lot of interest currently surrounds NXS’s 85% stake in the Crux liquids project (15% Osaka Gas-owned), which is Shell-operated and has a reserve estimate of around 75 million barrels of oil.
With liquefied natural gas (LNG) seeing global demand as an alternative fuel source, NXS and its peers are in good standing owing to the LNG boom and recovering commodities market.
The company is in the midst of securing financing for its share of Crux’s development, and a final investment decision (FID) is expected by the end of the year.
The Crux of the matter
Nexus is looking to commercialise the Crux project, but before a FID can be reached, it must secure financing. The group is currently trying to obtain up to US$1 billion in financing, with the lenders currently conducting due diligence.
Encouragingly, NXS has also identified a potential JV partner for the project, and is expecting a binding proposal in the next few weeks.
NXS’ proposed 35% sell-down of its equity stake in the project, combined with the potential US$1 billion in debt financing, are signs that the group is on track achieve the FID by the proposed target date.
The economics of the project have already been confirmed under varying capex and schedule sensitivities. Construction of the project is expected to total around $1.78 billion.
Therefore, achieving FID by the target date will help alleviate concerns over NXS’ ability to fund the project’s developments costs.
Whilst the stock has rallied ahead of the FID, we believe the market has yet to fully price in the huge revenue potential of the project (assuming a positive FID).
The Longtom and short of it
In late October, NXS reported Longtom gas production of 6.4 petajoules (PJ), which was 7.4% higher than the previous quarter.
Saleable gas production totaled 6.2 PJ, which was up 6.7% on June quarter output. This drove revenue up from $27 million to $29 million in the same period.
The increase in Longtom output has continued the turnaround in this asset, which faced production issues early in the financial year due to mercury detection in the delivered gas.
The installation of mercury removal equipment has so far allowed Nexus Energy to meet gas nominations under its contract with customer, Santos.
Future growth will come from the exploration of Longtom South, which is a prospect located 4km south of Longtom.
Given the proximity of the two fields, it wouldn’t cost NXS as much to develop Longtom South. If gas is ultimately discovered, it will provide another source of cash flow, thus increasing the company’s value.
Outlook
NXS has had a fantastic turnaround in the past few months, as anticipation builds ahead of its proposed FID by the end of the year.
The company is in the midst of securing financing for the project and is also in negotiations to sell down part of its stake.
That’s not to say either of these will definitely happen, as there is always the chance of NXS failing to obtain the required funding.
However, NXS hasn’t indicated any issues with the FID process thus far. Therefore we believe the potential payoff from taking a position in Nexus Energy is worth the risk.
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