Unconventional energy promises wild ride

Gas from coal is an under-appreciated source of alternative energy

The noisy debate about a “great rotation” out of bonds and into equities has obscured an equally engaging debate in the commodity space: that between the oil bulls and bears.

Regular readers will know that I find the discourse about the likely direction of energy prices compelling. It’s also a core investment challenge for the coming decades. Views are increasingly polarised between the oil bears, who think that new technology and substitution could see oil prices fall as low as $50 a barrel, and the “peak oilers” who believe that world output has already peaked and is in structural decline.

My own view is somewhere in the middle of this debate, based on the notion that oil prices will stay within a $90 to $120 trading range for the next few years. This is based on the observation that prices have remained remarkably resilient despite recent economic slowdowns and that cheap-to-produce oil is increasingly a thing of the past. I’d also note that natural gas prices are starting to rise in the US as more operators struggle to make money from the shale gas heartlands.

The easy way to get exposure is the obvious one: own shares such as Shell, BP and Total, either directly or via a fund such as dB x-trackers’ European energy sector ETF – it’s called the Stoxx Europe 600 Oil and Gas fund (XSER). An alternative is the “picks and shovels” stocks – oil service groups and equipment suppliers such as Hunting, Petrofac, John Wood and Weir Group.

But these give only limited exposure to unconventional oil and gas – and I’d like more. Ideally, I’d also like to ride the coming European wave of unconventional energy. But there’s a big problem. Unconventional oil and gas has yet to really get going on this side of the Atlantic, despite the UK chancellor’s evident enthusiasm. There is widespread environmental opposition, just as there is to more housing or wind turbines. I’d go so far as to suggest that unconventional oil and gas is a complete non-starter in all of western Europe.

Eastern Europe is much more promising terrain and I’m currently researching a few ideas here, but I’ve decided to buy into an alternative, truly unconventional energy source: underground coal gasification.

My chosen vehicle for this theme is Wildhorse Energy, which is listed on both the UK and Australian exchanges with the ticker WHE. Wildhorse has the enthusiastic co-operation of the Hungarian government, plus a series of licences throughout eastern Europe (especially Poland). Its directors are also in advanced discussions with local utilities which should bring a deal within the next 12 to 18 months.

Wildhorse is focusing on using synthetic gas from coal seams in eastern Europe for two simple reasons – the first is that there’s lots of it, and there’s a huge demand for alternatives to the dominant Russian supply of natural gas, and the many political complications it brings.

At the moment this a pure development project and it’ll need a lot of capital expenditure to get the project actually producing. That means either a big and dilutive fundraising or some kind of trade deal. Both options mean that Wildhorse is a risky play, like any other explorer or early-stage mining developer.

But it has one or two aces up its sleeve. The market opportunity huge, and the company has a superb South African technical team which is busy doing deals with those local utilities. I also like the look of the executive management team, which was also behind uranium investment vehicle Kalahari Minerals, sold to the Chinese last year. Its investor base also includes some very smart resource focused institutional investors.

My sense is that the markets will start to wake up to unconventional energy in Europe but soon realise that coal gasification is probably the only reliable way to go. That’ll prompt investor interest in Wildhorse, which will hopefully have supply contracts in place by then.

The share price is also underpinned by Wildhorse’s other big assets, which include a big uranium deposit in Hungary it has the right to develop. This neatly hooks into my other big long-term bet, which is that we need nuclear energy whether we like it or not. My preferred nuclear play is UK-listed uranium fund Geiger counter.

By my sums, if you buy Wildhorse you effectively get the uranium asset for free, which seems like a fairly good value play given that I think we’re all about to go mad about unconventional energy.


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