GeoMet: A pure play in coalbed methane
While GeoMet, Inc. (Nasdaq:GMET) has seen impressive growth and is in the hot field of unconventional gas production, the Houston, Texas-based company currently feels like it’s undervalued.
“We’ve always considered ourselves to be a growth story and now we also consider ourselves to be a very good value story,” CFO William Rankin said during a presentation at an April Oil and Gas Investment Symposium of the International Petroleum Association of America.
For a stock that’s trading at around $7 but has analyst targets of $10 to $14, he might have a point.
GeoMet bills itself as the second-largest pure play in coalbed methane gas in the country. With all the hullaballoo over shale gas, it’s easy to overlook some of the advantages of CBM — notably that it occurs at shallower levels than most conventional or shale reservoirs and it tends to be more productive.
Methane gas has long been recognized as a hazard in coal mining but it is only in the last 20 years or so that it has been commercially produced and distributed as natural gas. Current production of coalbed methane is about 1.25 trillion cubic feet a year, or 9% of overall U.S. natural gas production. The country has an estimated 100 tcf in recoverable CBM.
Whereas conventional natural gas is stored in the pores of the reservoir rock, coalbed methane adheres to the surface of the coal (adsorption), allowing large quantities of gas to be stored at relatively low pressures. This means that, in contrast to conventional natural gas, production actually increases as pressure decreases — first by pumping out the water that fills the pores and then by production of the gas. While most wells will be less productive the longer gas is being produced, CBM wells perform in an opposite manner.
The shallow depth makes the process cheaper than production from shale, which generally requires expensive directional drilling techniques. However, deeper CBM deposits will require hydraulic fracturing to maximize production, just as shale fields do. Lower production costs means that GeoMet can channel two-thirds of its revenue into investment in new fields, spending only one-third on production.
GeoMet has five major projects in four separate basins — the Gurnee field in the Cahaba Basin in Alabama; the Garden City prospect in the Chattanooga Shale in Alabama; the Pond Creek field and Lasher project in the central Appalachian Basin; and the Peace River project in British Columbia.
GeoMet has a couple of wrinkles that make it hard to follow. One is its active hedging policy, which generally sets both a floor and a ceiling on the prices it will get for its gas. The company is happy with its hedging policy and intends to expand it. However, the accounting requirement to mark the derivatives contracts to market each reporting period makes it harder to follow the underlying earnings performance.
Take GeoMet’s results in the first quarter ended March 31. The company reported a net loss of $2.1 million according to GAAP, compared with a net loss of $1 million the year-ago period. But unrealized losses on derivatives contracts of $8.6 million, or $5.5 million after taxes, compared with unrealized losses of $4.6 million and $3.2 million, respectively, in the first quarter of 2007, impacted those figures.
Adjusting net income to exclude these unrealized losses resulted in a net income of $3.3 million in the 2008 period, up 57.2% from $2.1 million in the year-ago period. Adjusted EBITDA in the period was $9.3 million, up 51.1% from $6.2 million in the year-ago period.
The other wrinkle is the long-running litigation with CNX Gas Co. (NYSE:CXG) over rights to run a pipeline in Virginia for its prolific Pond Creek field. The issue is now before the Virginia Supreme Court, and the company, based on the court’s decisions in earlier skirmishing over the issue, is confident of a favorable outcome. Executives also say the company has other viable alternatives for transporting the Pond Creek production.
At its IPAA OGIS presentation, the company touted some impressive growth figures — 30% compound annual growth rate in daily production from 2003 to 2007, reaching 18,600 cubic feet per day in 2007; a 36% annual increase in proved reserves during that period, to 350 billion cubic feet in 2007; and annual 38% growth in EBITDA over the period, to $26.1 million in 2007.
The average earnings estimate for the quarter ended June 30 (looking at the adjusted net income excluding unrealized losses) is $0.12, compared with $0.09 in the first quarter, and $0.05 in the year-ago period. The first-quarter figure of $0.09 was well ahead of the average $0.07 estimate for that period. For the full year, the average estimate is $0.45, compared with $0.18 in 2007.
Wednesday’s close of $6.27 gives GeoMet a market cap of $246 million, compared with the 52-week high of $10.12 on June 30 and the 52-week low of $4.06 in January.
About the Author
Contributing author Darrell Delamaide is a freelance writer and editor based in Washington, D.C. He has specialized in business and finance over a long career, writing for Barron's, Dow Jones, Institutional Investor, and Bloomberg, among others.
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Jul 25 04:46pm
cooment: good....more pls
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