Elixir Energy (EXR) - Australian Gas Acquisition Shows Intent

Elixir Energy Ltd. is an Australian gas exploration and development company focused on the exploration of natural gas in the form of coal-bed methane (CBM) in Mongolia. The company’s asset portfolio consists of its 100% owned Nomgon IX Coal Bed Methane (CBM) Production Sharing Contract (PSC) project, located in the South Gobi region of Mongolia and the Gobi H2 green hydrogen production project, located in the Gobi Desert. The company also recently added to its asset portfolio through the acquisition of the petroleum exploration permit ATP 2044 in Queensland

The current international oil and gas market has seen a tumultuous 2022. The global focus on power generation that is more ESG focused and driven has only added to the volatility. The acknowledgement of Gas as a greener alternative to oil by the EU has aided companies in raising funds, with the energy crisis unfolding in Europe assisting natural gas companies also. The European energy crisis is accredited to amongst other things the shutdown of the Nord Stream pipeline as well as the geopolitical tension caused by the activities of Russia in Ukraine.

Elixir Energy Ltd. announced on the 29th of August 2022, that it had acquired a 100% position in the petroleum exploration permit ATP 2044 in Queensland. The exploration permit was acquired through a special purpose vehicle, namely EnergyCapture Pty. Ltd. The petroleum exploration permit ATP 2044 was acquired for AUD$ 500,000 and the issuing of approximately 2.7 million shares of Elixir Energy Ltd. A third of the shares are in escrow for 8 months, another third in escrow for 18 months and the remaining third are unencumbered.

Elixir Energy Ltd. remains open to new acquisitions in the future, with the overlying criteria being that the asset must be able to benefit from the company’s existing skillset. The company has recently also initiated its extended production test at its Nomgon project aiming to delineate the first reserves of gas in Mongolia.

The current global oil and gas market

The oil and gas market has seen a tumultuous 2022, from the Nord Stream pipeline shutdown to Germany to increased price fluctuations as the global economy tries to implement sanctions on Russia regarding its activities in Ukraine. The focus on power generation that is more ESG focused and driven also adds to the storm. Neil Young, the Managing Director of Elixir Energy Ltd., explains the current global oil and gas market as follows:

“I think the most interesting phenomenon is the bifurcation of oil and gas. Generally over history, gas has been worth less than oil; it's harder to move around and less energy dense, but now we see significant premiums for gas in international markets over oil. I think that reflects the role of gas in electricity systems as an unmatchable glue that binds the whole system together. Fertilisers, chemicals - there is no other replacement, and of course, with one of the world's largest international suppliers, in effect, pulling out of the supply chain, that has dramatically changed gas markets for quite the long term.”

Young explains that the acknowledgement of gas as a greener alternative to oil by the EU has assisted in the raising of funds by natural gas companies, with the global shortage of natural gas and the energy crisis in Europe also adding to the market's potential.

“Gas is greener. Indeed, it's been recognized by the EU for that role. What governments see is that when you're philosophising about the long term, you can take a very green view, but when you're faced with a crisis of a lack of supply, and in Europe, we're going to really see that this winter, then you realise that fossil fuels are not yet replaceable. Obviously, I hope in due course, that they will be, but I believe that the nature of the laws of science is such that in due course will be decades rather than years.”

The strategy of Russia selling its natural oil and gas to countries in the east, such as China and India, has not affected the business case of Elixir Energy Ltd. according to Young. He explains that even though Russia may be selling to possible end-users in the proximity of the company’s operations, the Eastern market and China in particular will view sourcing from countries in its direct vicinity as more secure than from Russia.

“The switcheroo is easy to arm wave about but it's very hard to do. What that means in Mongolia is really twofold: as a Chinese buyer, I will naturally talk to the Russians, but I won't trust them. I will demand a low price but if it's a neighbour who is much closer and who is not in a position to act as the Russians have, then I'll see that as being a very reliable and secure source of gas. We think that the war has increased the value of immediately proximate gas in Mongolia to Chinese markets.”

The bifurcation of the market will endure for the medium to long term according to Young. The moment a country proves to be an unreliable supplier, it will find it difficult to re-enter the market.

“I think it will endure for the medium to long term because of the time frames that I mentioned. In Europe itself, once a country has proven itself to be an unreliable supplier, people are going to take a long time to come back, even if there was a beneficial political change, which, of course, we would all like to see, but there are many factors that might weigh against that. I see Russia has taken itself out of the European supply, hence global supply for the long term. The rebound from that will take a while, and that rebalance is seen, obviously, in America with lots of LNG plants being built.”

Queensland acquisition

Elixir Energy Ltd. announced on the 29th of August 2022, that it had acquired a 100% position in the petroleum exploration permit ATP 2044 in Queensland. The exploration permit was acquired through a special purpose vehicle, namely EnergyCapture Pty. Ltd. The company was able to acquire the asset without having to raise any funds, with its strong cash position of AUD$ 22.7 million, as shown in its June Quarterly report, aiding this endeavour. Young describes the company’s rationale as an opportunistic move, brought about by the rapid change in the dynamics of the international gas market.

“I think the primary driver is opportunistic. Our technical team are pretty experienced guys, they know the Taroom Trough, which was first drilled by QGC when it was owned by BG. QGC was a company that Richard Cottee took to a USD$5 billion to USD$ 6 billion takeout by BG group. Of course, BG is now owned by Shell, who are still there. The opportunistic driver wasn't really geology; the geology was sort of known, it was the international advance of rising gas prices in Australia and internationally for, in our view, the long term.”

Young further explains that EnergyCapture Pty. Ltd. released the asset to enable the project to be firstly advanced by a larger company with a larger balance sheet, and secondly due to Elixir Energy Ltd.’s ability to acquire the project at a faster rate than a larger corporation like Shell.

“The acreage that we've targeted was held by a private company, and it was opportune for them to sell to someone with a bigger balance sheet and for us to acquire something far more quickly than a company like Shell or its peers could ever do. The defensive aspect is of much less importance, but it is still there. I think it's sensible for any company to have an array of assets that recognize geological and geopolitical risks.”

The petroleum exploration permit ATP 2044 was acquired by the company for AUD$ 500,000 and the issuing of approximately 2.7 million shares of Elixir Energy Ltd. A third of the shares are in escrow for 8 months, another third in escrow for 18 months with the remaining third unencumbered. The company also issued a 3% overriding royalty on the production of hydrocarbon liquids at the asset to EnergyCapture Pty. Ltd. Young explains the terms of the acquisition as follows:

“The acquisition price was USD$ 500,000 in cash, USD$ 3 million in company stock and a royalty over the liquids-only component of any future production, and it is primarily a gas play. It was a pretty good deal and a successful case for the vendor, who is a private company, and for us, one that we could afford and that we can afford to take on through the next stage of an appraisal. If that appraisal is successful, in our view, this asset will ultimately end up in the hands of people like Shell, and I think the key challenge for oil and gas stocks in particular, given ESG and other drivers, is to have an asset that ultimately can attract capital and large company interest.”

Elixir Energy Ltd. will in the future involve a partner to drill an exploration well at the exploration permit. The exploration well will be quite deep according to Young, which will cost a fair amount. The company aims to involve a partner with a larger balance sheet than itself, and with a market cap of USD$ 470 million, the partner it involves will be a large company like Shell. Young explains the ideal partner for the company as follows:

“Certainly, we'd be looking for someone with a considerably larger balance sheet than ours. Technical expertise is not as relevant because we can operate the first few wells here ourselves, and then if successful, the ultimate ownership of the play will work itself out. The type of parties that could be included, given the international market dynamics, could be LNG buyers in the traditional oil markets of East Asia, such as Japan and Korea. In addition, as a potential European leg opened up, you could see, for instance, German buyers, who would never normally look to a country like Australia, they are now very much incentivized to do so.”

Future plans

Elixir Energy Ltd. remains open to new acquisitions in the future, with the overlying criteria being that the asset must be able to benefit from the company’s existing skillset. The company’s rationale is that as the asset portfolio grows and develops, it will be able to mitigate any unexpected situations which may be caused by geological factors. Young explains the company’s intent regarding any future acquisitions as follows:

“I think the nature of a resources company is that it takes assets forward using its skills, and passes them along to parties at various times. There is the possibility of occasional failure due to geology or whatever, and having a suite of assets mitigates against that. Ultimately, we would like everything to win and we think that the more that you build bridgeheads, the more creative opportunities come forward. Since we announced this just over a week ago, we've had various parties coming up to us with their cunning plans.”

The company will continue to develop its Mongolian assets as it continues with its new endeavours. Elixir Energy Ltd. has faced challenges regarding the Chinese-Mongolia border and the access of personnel and equipment into the country. The company has however recently been able to initiate its extended production test at its Nomgon project. The company believes that the production test will be fruitful with the aim being to delineate the first reserves of gas in Mongolia.

Whilst the future holds various possibilities, Young explains that the company, for time being is content with its assets in Australia and Mongolia.

“..the market would want us to pass a few milestones on our current asset plans before allowing us to go and run off and, for instance, buy something in the States or wherever. I think that two countries are enough for just now, but never say never.”

To find out more, go to the Elixir Energy website