Linc Energy (LNC) is doing some of the most exciting things in the energy sector of any emerging Australian energy producer. That’s because it is focused on both ‘conventional’ oil and gas and the more exotic ‘unconventional’ hydrocarbons.
On the conventional side, Linc has interests in oil and gas production in onshore USA regions – namely Alaska, Texas, Louisiana and Wyoming – from which it produced 6,000 bopd (barrels of oil a day) in 2012. Linc is targeting up to 9,000 bopd by the end of this year.
On the unconventional front, Linc has extensive exploration tenements in the Arckaringa Basin of South Australia: in January, it announced it was sitting on a potentially massive shale oil (oil trapped within rock) resource around Coober Pedy. At the highest end of the independent estimates that accompanied the announcement was a figure of 223 billion barrels of oil.
But Linc’s prime unconventional play is its world-leading position in underground coal gasification (UCG) technology, which can convert coal in situ into a valuable synthetic gas, and then convert that gas to liquid fuels through the gas-to-liquids (GTL) technology.
Linc has invested $200 million since 2004 in developing its proprietary UCG technology. It owns and operates the world’s only commercial UCG operation at Angren in Uzbekistan, which supplies synthetic gas to a nearby power station. The company has also built and commissioned the word’s only UCG-to-GTL demonstration facility, at Chinchilla in Queensland.
What has pricked investor interest in this process is that Australia, along with many other countries, has billions of tonnes of “stranded” or low-quality coal, hitherto regarded as useless, that could through this technology become a highly valuable future source of liquid hydrocarbons.
It helps that Linc chief executive Peter Bond has a Richard Branson-like penchant for publicity stunts. First, in 2011, Bond drove a car fuelled solely by Linc diesel made at Chinchilla, to Perth via Canberra and all capital cities in between. A year later he topped that by flying his Citation CJ2 corporate jet from Brisbane to Perth, again using fuel made at Chinchilla. This was the first time a fuel made by the UCG-to-GTL process had powered a jet aircraft. (Bond also owns a 1944 Spitfire and a 1943 Harvard trainer.)
This achievement made Linc the only company in the world to have produced electricity, diesel and jet fuel from synthetic gas made by the UCG-to-GTL technology.
In April 2012, Linc Energy partnered with a subsidiary of Hong Kong listed Golden Concord Holdings (GCL) to commercialise fuel using its UGC to GTC technology China. Golden Concord bought a 5% stake in Linc for $120 million.
In December 2012, Linc signed an agreement with Ukraine’s largest energy company, DTEK, to assess several of its coal resources for potential UCG and UCG-GTl applications. In May of this year, Linc signed an agreement with South African diversified mining company Exxaro Resources to develop commercial UCG projects in sub-Saharan Africa. Exxaro will decide where in the coal-rich African continent to commission UCG projects: Linc Energy will hold a minimum of 15% equity in the first project and have the option to participate up to a 49% equity position in all UCG or UCG-GTL projects that Exxaro develops – as well as receive royalties on any synthetic gas produced and sold.
LNC – August 1 2013 – Quarterly Activities Report
The other arm of Linc’s business is coal, but it does not do this itself. In 2010 Linc sold a package of Queensland coal tenements to Indian energy giant Adani for $500 million, as well as a royalty of $2 – indexed for inflation – on every tonne of coal exported from any eventual mine, for the first 20 years. Adani is planning a $10 billion project based on a mine called Carmichael on the ground it bought from Linc, a rail line to Abbott Point, near Bowen, and a 99-year port lease to expand Abbott Point.
Adani has not yet received all of the government approvals required but Linc believes the Carmichael coal project will start over-burden removal towards the end of 2013 and achieve a mining licence in the first quarter of 2014, with exports to begin in the first quarter of 2016 and full production (60 million tonnes a year) achieved by 2022. The company says the Carmichael royalty will drive its cashflow in the medium term.
Linc also holds a global portfolio of coal tenements and exploration leases, in Queensland, South Australia, Uzbekistan, Poland and the United States.
The conventional portfolio’s production growth depends heavily on bringing the Umiat field in Alaska to production. Umiat, of which Linc took control in 2011, holds the vast bulk of the company’s 2P (proved and probable) reserves and present value: it is potentially a 155 mmboe (million barrels of oil equivalent) field, with 194 mmboe targeted on a 3P (proved, probable and possible) basis. That is 93% of Linc’s total 3P figure.
Linc is not for the faint-hearted. In November 2012 the shares languished at about 50 cents. The shares started 2013 at $1.17, surged on the back of the Arckaringa announcement to $2.95 by March, and then slumped after a US$200 million capital raising and re-traced back to 80 cents by July – seemingly a case of too much good news, too soon, for any one stock to digest. Now the shares stand at $1.55. That’s not quite the bargain they were at 80 cents – but at these levels, taking an interest in Linc Energy could be well worth the trouble.
