Boom and Bust Rocks Dart Energy

Cavalier coal seam gas company Dart Energy has a habit of upsetting people. Here Sydney residents protest after the company announced plans to drill inside the city.

The 2-year-old company planning 22 coal bed methane wells in Airth, Scotland already has a history of boom and bust. Only a year after Dart Energy’s $300m launch in 2010 the company was forced to write off $101.8 after the impulse purchase of a smaller gas outfit (p4) proved to be much less valuable than expected.

The group then spent $146m in 2012 (see p 4 of Dart’s Financial Accounts) mostly on test drilling and buying new UK drilling areas. Despite this, Dart actually lost worth: asset value fell from $336m to $326m (ibid) Shareholders took flight, with the share price falling by 18% over the same period.

The company has now run out of cash: a good thing friendly bankers HSBC stumped up a $100m overdraft in April (HSBC also own 4% of the company’s shares).

In an attempt to stabilise its rabid cash burn, the company is looking to new avenues. Plan A was to sell off international operations via the Singapore stock exchange (Dart have a friendly Singaporean ex-minister on their board). But “poor equity conditions” put the kybosh on that this summer. Rumour has it the company will try again in London soon.

Consequently plan B: borrow. The $100m HSBC overdraft provides some leeway. Yet while Dart continues to spend, problems in Australia and Scotland have undermined Dart’s promise for investors.

In Australia, the company owns 3 coal bed methane licenses, all in New South Wales (NSW). These hit trouble with 2011 election of a new NSW State Government who – after public pressure – suspended approval and renewal of exploration activities. That ban was recently lifted, but the company was held up for nine months in the process, adding significantly to costs.

Then, in early September, a residents group – Fullerton Cove Residents Action Group at Dart’s most advanced Australian drill site took the company to court. After a 7-day blockade of the site a judge duly suspended drilling activiites. The case resumes shortly.

In Europe, meanwhile, the company has continued spending, buying other companies and the rights to 32 licences in the United Kingdom, three licences in Poland, two in Germany (subject to regulatory approval) and one in Belgium (p7).

Crucial is the 2011 purchase of the UK’s Composite Energy for $42m. This gave Dart access to their most important European site: Airth in Scotland where 22 production wells are in planning. This is the first of the company’s operations worldwide to be close to producing actual gas. Dart also has an agreement with Scottish & Southern Energy (SSE) whereby the Scottish company will buy 5 years’ of gas, allowing – finally – visibility on some desperately-needed cash.

Just as in Australia, however, this project has raised community objections. Several hundred objections have been made to planning permission at Airth (see the comments made here and here), with several months yet to run on the consultation. Gas buyers SSE could also be sensitive to consumer objections to dirty gas.

Dart Energy is a typical oil and gas startup. The directors are borrowing – and spending – money in the hope of developing gas sites that can then be sold, much as they did with Australian Arrow Energy, which was sold to Shell and PetroChina in early 2010.

What is unsual, however, is that Dart’s gas prospects are often in high density population areas. Here residents take it badly – very badly – that a bunch of oil millionaires are about to spill millions of gallons of contaminants in their back yards.

It’s a high-risk business. And while it may be beneficial to the owners (CEO Nick Davies netted $25m from the Arrow sale) residents are forced to shoulder the costs – without any of the rewards.

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