QPM Energy – Perfect timing for this ‘new’ Queensland gas play

This article is about QPM Energy, ASX: QPM. Heads up, one of us owns stock in this company.

QPM whom, you say? If you’ve never heard of QPM Energy, you’re not alone. For a long time, this gas producer was called either Pure Minerals or Queensland Pacific Metals, and its goal was to develop, not a gas project, but TECH, that is, the ‘Townsville Energy Chemicals Hub’. Queensland Pacific Metals had a new way of being able to produce nickel sulphate and cobalt sulphate, and other valuable co-products, from lateritic nickel-cobalt ore, and it intended to do this in Townsville in a new processing facility using high grade ore imported from New Caledonia.

Last year Queensland Pacific Metals picked up a producing gas project called Moranbah, intending to use the gas to fuel the future nickel-cobalt operation. Not long after that the company realised that gas was far more valuable than nickel in the current economic climate, and since April 2024 it has been primarily focused on developing the potential of Moranbah. Hence last month’s change of name, to QPM Energy.

 

The Project that made Arrow Energy

The Moranbah Gas Project is a coalbed methane project located in the northern part of Queensland’s Bowen Basin around 400 km south of Townsville. It’s been producing for around 20 years and supplies gas to the Dyno Nobel ammonium nitrate plant of Incitec Pivot in Moranbah, as well as the gas-fired Townsville Power Station which generates electricity for peak-demand use. Under QPM’s stewardship, Moranbah has arguably turned into a ‘company-maker’.

 

 

Moranbah originates with CH4 Gas Ltd, a coalbed methane project developer that had been built with considerable financial backing from Macquarie Bank in the early 2000s. CH4 Gas had gone public in 2004 with 50% of Moranbah as its flagship asset just when it was commissioning.

Two years later, CH4 Gas was acquired by Arrow Energy for about $290m. The attraction was the largest operating coalbed methane project in Australia with annual production capacity of 16 PJ, and the chance to markedly expand the scope of this project to serve not just Townsville but Gladstone as well. Moranbah helped Arrow, as the superstar of the coalbed methane boom in Queensland, to ultimately be acquired for A$3.5bn by Shell and PetroChina in 2010.

 

Starting at less than zero

Now fast forward 13 years to a very different gas economy. In 2023 Arrow and AGL, which owned the other half of Moranbah, handed over the project to QPM for minus $30m. You read that right. So long as QPM took over Moranbah’s contractual obligations the venders would pay it $30m to take over an asset on which about $1bn had been spent over the years since 2004.

Moranbah had been a nightmare for Arrow and AGL because the project’s sales revenue was well below the fixed costs which they were contractually obliged to pay for capacity on the North Queensland Gas Pipeline and the Townsville Power Station. These agreements had been originally written when Townsville was a baseload station. When it became a peaking station – one that only dispatches power at times of peak demand – it was taking much less gas.

All this didn’t worry QPM too much, because in 2023 it wanted Moranbah primarily to supply energy to TECH. More importantly, those uneconomic contracts were running out at the time QPM took over the project, and in an environment where Australia’s East Coast was starting to run short on gas, and gas prices were through the roof, there was a good chance they could be renegotiated.

 

Fixing the fixed price crontacts

The Arrow/AGL transaction was announced in April 2023. Within a couple of months Dyno Nobel had agreed to a new gas supply agreement  including a commitment to an $80m facility for project development. QPM took control of Moranbah in August 2023 and proceeded to successfully re-invigorate the asset, increasing both production and reserves.

 

 

In August 2024, QPM management secured a new agreement with RATCH, enhancing the economics of the Townsville Power Station by allowing QPM to share in peaking electricity revenues, while also achieving more favorable gas transport terms with the North Queensland Gas Pipeline owners, eliminating significant fixed costs and enabling QPM to focus on maximizing Moranbah’s gas reserves. This progress was led by David Wrench, who became CEO after previously overseeing the Moranbah Project.

A year later, in August 2024, QPM management effectively brought home the bacon. A new agreement with RATCH, the Thai company which owns the Townsville Power Station, was finalised that materially improves the economics of the power station, with QPM getting a cut of the peaking electricity revenues. And at the same time the private owners of North Queensland Gas Pipeline, which runs from Moranbah to Townsville, agreed to more realistic terms for gas transport.

Suddenly a whole bunch of fixed costs were taken out of the business and QPM could focus on realising the value of Moranbah’s gas reserves. The team that achieved this was led by David Wrench, who had originally helped put together CH4 Gas for Macquarie and since 2023 had been in charge of the Moranbah Project. In April 2024 he had been named CEO of the whole company.

 

You want gas? QPM Energy has got plenty

The Moranbah reserves, and the associated production capacity, are significant. At the 2P level there’s currently 331 PJ of gas at Moranbah and over 200 PJ of that is uncontracted, which is great given the high gas prices that look like they’ll be around for a long time to come. There’s another 269 PJ of 2C resources. QPM believes it can considerably increase reserves and resources over the next twelve months. As for production, QPM can easily increase this one it has the customers. Moranbah has a production capacity of 64 TJ per day, but currently it only does around 30 TJ a day.

We expect good times ahead for QPM with Moranbah. As electricity demand races ahead of supply, QPM will likely increase its peaking electricity revenues. However, at the moment the share price is undervaluing the value of the molecules that makes that possible. QPM Energy currently trades at an EV/2P reserve multiple of only around 30 cents a gigajoule. Contrast that with a deal which Hancock Energy did with Mineral Resources in late October, when EPs 368 and 426 in the Perth Basin traded at more like $2 a gigajoule.

 

Don’t write off nickel

And then there’s TECH, for which there is likely no value at all in the current QPM share price. That project, which has been part of the listed QPM since 2018, hasn’t gone away, and the company continues to incubate it with government grants. The technology behind TECH involves the use of recycled nitric acid to leach nickel-cobalt ore, resulting in high metal recoveries and low acid consumption. TECH represents a very clean and low-cost way to make nickel and cobalt.

In November 2022, QPM put a base case NPV of A$2.7bn on this project, albeit after A$1.9bn in capital costs. The project is only on ice because, at US$15,000-16,000 a tonne on LME, no one is thinking about new nickel projects right now. However, given the long term demand profile for clean nickel in a decarbonising world, this project stands a chance of being commercially attractive in the medium term and provides great option for shareholders to participate in a recovery in the nickel market.

In the meantime, there’s plenty of money to be made in gas. For years before QPM bought Moranbah AEMO had been predicting gas shortages on the East Coast, and since about the time of the Moranbah transaction those predictions have been coming true.

People in Sydney, Brisbane and Melbourne have started to worry about blackouts this summer thanks to power shortages. In this environment, emerging gas companies like QPM are likely to be increasing well favoured, by public policy as well as by investors.

 

 

 

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