China is seeing a boom in demand for so-called 'unconventional energy' as the world's most populous nation searches for new resources to feed its growing economy. Exploration and production of shale gas, tight gas and coal-bed methane is consequently strongly supported by the government, and Leyshon Resources (LRL) - a China-focused gas explorer with acreage in one of the country's largest unconventional gas basin - is well-positioned to exploit this opportunity.
- Tapping energy boom in China
- Exploration results due soon
- Excellent infrastructure nearby
- Market value barely above cash
- No other projects lined up
- Scepticism around Chinese resource plays
Leyshon's land lies next to several recent discoveries that run into several trillion cubic foot (TCF) of gas, and independent consultant RISC estimates that the company's Zijinshan licence could hold from 1.0 to 3.8TCF of gas.
Yet prospective resources don't mean much until proven by the drill bit, so Leyshon is drilling the first of at least two wells into a formation hoping to find tight gas within layers of sand. The well is scheduled to reach its planned depth by the end of November, with the results to follow shortly after.
Like many small-cap exploration companies, Leyshon is overlooked by the City, so there is little research of its Chinese gas play. As a result, estimates for the net asset value of its Zijinshan licence are hard to come by. But off-the-record estimates from one broker suggest that the discovery of 1.0TCF could be worth around 11p a share, and a 3.8TCF find could be worth as much as 46p a share.
That's because recoverable resources at Zijinshan would be relatively cheap to turn into cash since an operating gas pipeline is located just six miles away. Recent well head contracts for gas in the region have also been struck at favourable prices - approximately $6 to $7.5 per thousand cubic feet compared with $3.50 in the US.
LEYSHON RESOURCES (LRL) | ||||
|---|---|---|---|---|
| ORD PRICE: | 15p | MARKET VALUE: | £37m | |
| TOUCH: | 14.25-15p | 12-MONTH HIGH: | 17p | LOW: 10.75p |
| DIVIDEND YIELD: | nil | PE RATIO: | na | |
| NET ASSET VALUE: | 13p | NET CASH: | A$51.0m | |
| Year to 30 Jun | Turnover (A$m) | Pre-tax profit (A$m) | Earnings per share (A¢) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 1.05 | -10.41 | -4.8 | nil |
| 2009 | 0.52 | -1.93 | -1.6 | nil |
| 2010 | 1.47 | -1.79 | 12.2 | nil |
| 2011 | 3.01 | -0.53 | -0.3 | nil |
| 2012 | 3.06 | -3.14 | -1.4 | nil |
| % change | +2 | – | – | – |
Normal market size: 18,000 Market makers: 9 Beta: 1.14 £1=A$1.53 | ||||
That said, RISC estimates the chance of success for the first well at just one in six. These are tough odds, but they're no worse than many other wildcat exploration plays with much higher drilling costs. Leyshon is spending just $3m (£1.89m) to drill the first two exploration wells, which includes drilling, logging, casing, fracking and flow testing.
So, while the upside could be high (if far from certain), the downside is limited because Leyshon's current market capitalisation is only slightly higher than its net cash of $49.7m at the end of September. Even after the $3m drill programme, the company should have around $46m, equating to about 11.5p a share.
True, should Leyshon fail to find commercial quantities of gas, the shares may well trade below this backstop as the company doesn't have another substantial exploration project lined up, and there is scepticism around Chinese natural resource plays. But the risk-reward profile of the first well looks too compelling to ignore.
