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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Linc Energy (LNC) is Australia’s leader in clean coal technology.

LNC has successfully combined two known technologies and demonstrated its vision of being a leading supplier of a new source of clean liquid transport fuels for the future.  These technologies are Underground Coal Gasification (UCG) and Gas to Liquids (GTL).

The company’s use of UCG and GTL technologies will enable stranded underground coal deposits to produce the relatively “green” Syngas, which can be converted into fuels.

LNC also has extensive mining tenements across Queensland. It has also been expanding its presence abroad with investments in Vietnam, the US, India and China.

It also produces crude oil in the US and is looking to expand production.

Linc Energy received an offer from a Hong Kong-based company for its Teresa coal asset in Queensland state, and is waiting for three other companies to submit bids before it announces a sale.

The coal case

LNC is not simply a green Syngas company, but has mining sector exposure via its extensive mining tenements across Queensland.

It has been using funds from asset sales to develop its coal gasification and gas to liquid businesses.

The Teresa coal resource contain a mix of coking coal and thermal coal and is capable of producing 5.5 million metric tonnes a year.

An increasing number of end users are bidding on coal assets because they can secure the price of their coal supply rather than be subject to volatile market rates.

LNC has made significant progress, recently signing an MOU with Huandian Coal Industry Group to form a joint venture and is now looking at different locations in China to begin a project.

In both India and China, LNC is in various stages of talks with major coal companies about possible partnerships.

LNC is in the process of completing due diligence on a few acquisitions in the US.

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Financials improving

For the first half, LNC recorded a NPAT of $327.65 million (up from a loss of $34.8 million) on year.

This translates to an EPS of 66.1 cents per share, up from a loss per share of 7.7 cents the previous year.

The result was primarily driven by the sale of the Galilee non-core coal tenement.

LNC sold the tenement for $500 million, plus royalties of $2 per ton over 20 production years to India’s Adani Mining.

Its balance sheet remains strong with cash and cash equivalents of $67.4 million.

Looking ahead

LNC has a lot on the go at the moment in various geographical spaces.

The company has plenty of growth potential from its US strategy and the monetisation of its Queensland coal assets.

Higher coal prices and higher demand for coal will also be key growth drivers as Japan looks to rebuild and nuclear power becomes less attractive.

With significant coal deposits suitable for UCG technology, LNC can provide alternative sources of liquid fuels and power generation well into the foreseeable future.

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Beach Energy (BPT) is an oil and gas exploration and production company based in South Australia. BPT has oil and gas reserves of 66 million barrels of oil equivalent (mboe) equivalent and contingent resources of 297 mboe.

The company holds interests in more than 300 exploration and production tenements in Australia, New Zealand, Papua New Guinea, Tanzania and Egypt among others.

BPT was among the worst performers in the Australian share market last year on the back of declining oil and gas production.

The drop in output was due to planned and unplanned downtime at the Basker Manta Gummy project and a natural resource decline and downtime at the Cooper Basin.

Unsuccessful exploration in the Bass Basin also resulted in a $64 million writedown.

The end of last year saw things start to turn around for BPT as it gained majority control of Impress Energy in an on market takeover.

A revival of shale gas assets in the Cooper Basin helped by enhanced drilling technology gave BPT further upside.

This year has been all in all positive for Beach Energy as oil prices surge to new highs.

Impressive takeover

On 6 December 2010, BPT announced a recommended and unconditional on market cash offer of 8.5 cents per share for all the issued and outstanding shares of Impress Energy it did not own.

BPT subsequently gained majority control of Impress on 14 December 2010.

Overall, BPT spent $38.1 million on the Impress acquisition.

The Impress takeover gives BPT access to the Cooper Basin Western Flank oil. Impress holds a 40% interest in highly prospective Western Flank oil acreage.

Drilling has commenced and if successful will provide a material reserves upgrade and subsequent significant increase in operated production during FY11 and FY12.

A dominant shale gas acreage in the Cooper Basin has shown encouraging results with potential for a material resource booking in 2011.

Saved by oil again

Beach Energy this week reported its 1H11 results, keeping the market happy.

Gross profit for the half of $37 million was down 18% on the prior year, driven mainly by lower production.

Sales revenue gained 2% to $265 million due to higher prices, partly offset by higher Aussie dollar.

Oil sales revenue was up $3 million due to higher sales volumes, which included the sale of crude from the Jackson-Moonie pipeline.

Underlying profit for the half totalled $19 million, 27% lower than the previous year’s half.

BPT declared a 1 cent per share dividend based on its FY10 results and has further announced a half dividend of 0.75 cents per share.

Oily time

For the first half of FY11, BPT achieved an average oil price of US$81 a barrel, up 8% on year. Average gas prices were also up 8%.

Oil prices have since had an impressive run, currently hovering around the US$100 a barrel level.

Tension in the Middle East and North Africa is threatening oil supply which has resulted in a run up in oil prices.

However, a stronger Aussie dollar is likely to offset part of the oil price gain effect.

Looking ahead

BPT had $179 million cash on hand and no debt as at 31 December 2010 which gives it plenty of room for further exploration.

The company has a large resource base and excellent prospects for reserves growth via resource conversion and exploration.

BPT has given FY11 production guidance of 7 mboe which may be upgraded following the Impress takeover.  It has been one of the hot shares to buy in recent months, surging more than 30% since early December.

We feel the stock has significant upside potential on the back of the Impress takeover and rising energy prices.

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