Opportune time to take some profits
As we have previously highlighted, the sustained high level of corporate activity in the coal seam gas (CSG) sector in Queensland has been good news for our long-time portfolio CSG favourite, Arrow Energy. Adding to the company’s lustre is that it is the last of the sizeable independent players in the sector and remains one of the primary participants in terms of delivering CSG-derived export LNG from Queensland to Asia. Nevertheless, given its strong recent price performance we believe it is opportune to lock in some profits.
Fat Prophets initially recommended buying Arrow Energy at 75 cents in November 2005 (Fat Mining 2). Our last review of this stock was during August (Fat Mining 188).
From a charting perspective, Arrow Energy has been a standout performer during 2009. From a low of $2.05 in January, prices have more than doubled over the past nine months, reaching a high of $4.73 in August.
Despite breaking to new all time highs, type A bearish divergence has emerged on the weekly chart. This is where a new price high is accompanied by a lower high on a momentum study, in this case, the slow stochastic. In our opinion, this increases the likelihood that prices will now correct a portion of the 2009 rally, or consolidate at best.
In our opinion, previous resistance in the $4 region will now offer the first level of support. A break below this level would return focus to the July low at $3.04. Hence, we believe now is the right time for Members to lock in some profits and we accordingly have a Sell Half recommendation on Arrow at around $4.28.
As we have previously highlighted, Arrow Energy is Australia’s last major independent player in the Queensland CSG space. The company is therefore well positioned to benefit, either from an eventual transition to production in its own right, or from a corporate buy-out from one of the host of international players keen to secure a spot on the LNG starting grid. And the most likely candidate at this stage to bid for Arrow is project partner, Shell.
To gain a proper appreciation of growth potential and hence its attraction to a company like Shell, it is important to reiterate the vast scope of the company’s resource position. Arrow has identified 70 TCF (trillion cubic feet) of gross gas resource potential on its Australian tenements.
Furthermore, if only one-third of this gross 70 TCF potential transfers into commercially-producible reserves, there will still be sufficient gas for more than 20 million tonnes per annum (mtpa) of LNG. This will ensure that Arrow is one of the leading players in the evolution of the LNG industry in Queensland.
It is this vast development potential that attracted energy giant Shell to Arrow in the first place. Arrow has an A$1 billion alliance with Shell, under which Shell purchased a 30% stake in Arrow’s domestic CSG acreage, along with a 10% stake in Arrow’s international business.
Arrow itself has confirmed that it has continued to engage with Shell in relation to potential commercial arrangements with respect to Shell’s proposed Curtin LNG Project. And this could be the key to Shell’s overall interest, as there is a growing view that Shell may not have enough in-house gas to comfortably underwrite the development of Curtis.
All of this reinforces Arrow’s position at the forefront of the rapidly evolving LNG industry in northern Queensland. We have stressed in the past that the company’s project and corporate attractions make it an essential stock in any resource investment portfolio. And we haven’t changed our view.
However the strong recent share price run means that we now recommend that Members lock in some profits around current levels. Hence we have a Sell Half recommendation on Arrow Energy around $4.28. The company will continue to remain held within the Fat Prophets Mining & Resources Portfolio.
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