Red Sky Energy secures $3m funding, platform to commercialise coal seam gas assets

Red Sky Energy (ASX:ROG) has secured a $3 million funding facility from U.S. based Investment Fund YA Global Master SPV Ltd.

With the facility, Red Sky has sufficient cash reserves to fund the proposed Talma pilot test at the company’s shallow gas discovery at Kangaroo Creek in the Clarence Moreton Basin, in north east New South Wales.

Under the terms of the funding facility, Red Sky may, at its discretion, issue shares to YA Global at any time over the next three years, up to a total of AUD$3 million. Red Sky may draw down up to AUD$100,000 in any 10 trading day period.

The funding facility can be drawn down at any time over a 3 year period, and can be cancelled at any time.

Red Sky’s immediate priority is the drilling of the Talma pilot well.  A recent Resource Study concluded the Kangaroo Creek sandstone gas discovery to be a highly prospective lead. The company plans to drill a pilot production well at Talma to perform a long term production test to determine the magnitude of the resource.

Regulatory approval process for the Talma pilot is currently underway, and landowner consents are in place.

Coal Seam Gas in Clarence Moreton Basin

Red Sky has a right to earn 100%, earned 30% so far.  Reserves independently certified by MHA Petroleum Consultants (100% basis) are as follows:

- Probable Reserves 2P 17PJ
- Possible Reserves 3P 380PJ
- Contingent Resources 2C 629PJ

Red Sky's 30% interest in the permits PEL 479 and 457 are valued at around $57 million based on the Santos (ASX:STO) acquisition of Eastern Star Gas metric multiple.  The total of 1 TCF of recoverable gas would have a revenue value of around $4 billion at today's gas prices.

The shallow gas discovery is a shallow non conventional gas play, hence a potentially low cost development for Red Sky.

Proposed Talma Pilot plant

The proposed Talma pilot will earn a further 10% in PEL 457.  An initial 30% interest in PEL 478 can be earned by drilling one well, with option to increase interest to 70% as per PEL 479 and 457.

Once a 70% interest has been earned in two permits, Red Sky has the option to purchase the residual 30% interest based on an independent valuation.

Resource evaluation plan

A single well pilot is planned and to re‐enter Talma 1 core hole.  It is envisaged to drill the pilot well during late 2011 (subject to regulatory approvals which are pending).

Significantly, production could commence by year end.  The pilot well will operate over an extended period.  Extended testing over several months could allow initial reserves certification. This will be followed up with two step out pilot wells (within 1‐2kms).

Commercialisation plan

With significant local demand of over 250MW, gas into power is a viable option with a nearby high voltage electricity grid and a comparable gas pricing to that selling into LNG.  With gas prices expected to rise strongly and LNG pricing linked to the oil price and likely to flow through to domestic gas prices within 3‐5 years (as happened in WA), the path to monetisation appears very strong for Red Sky.

An initial 10‐15MW project fuelled by pilot gas, with gas engines the preferred configuration would be highly scaleable.  The quickest route to production would likely be to use pilot gas from the Kangaroo Creek resource. A Phase 1 small power station is likely more achievable.

With the fundamentals of gas in Eastern Australia, attractive for export as well as for domestic gas demand, and domestic gas prices tipped to rise, Red Sky is extremely well positioned ticking the boxes:

- Relatively low exploration risk
- Access to gas market
- Well located
- Highly experienced team
- Funded through to next phase

Clearly, with a market value significantly below its peers including:  Planet Gas (ASX:PGS), Comet Ridge (ASX:COI), Blue Energy (ASX:BU), Exoma Energy (ASX:EXE) and Icon Energy (ASX:ICN) - Red Sky has some significant advantages not the least of which is its strong management and ability to build and develop gas assets.

In addition, in the recent market sell off, Red Sky looks to have been sold off to a market value of just $8.2m, at a rate greater than its peers.  The current funding facility provides a platform for value to be created for Red Sky.

Managing director of Red Sky, Rohan Gillespie was vice president and chief operating officer and created BHP Billiton’s CSG business. Clearly, this plus extensive experience in gas commercialisation will hold Red Sky in good stead for future development of gas assets.

Originally published at: http://www.proactiveinvestors.com.au/companies/news/20048/red-sky-energy-secures-3m-funding-platform-to-commercialise-coal-seam-gas-assets-20048.html