Top public companies 2010: Arrow Energy

MAR 2010

ARROW Energy (AOE) recorded a 46.9 per cent rise in electricity sales in the December quarter, but CEO Shaun Scott says the next leg of growth will come from its LNG project at Fisherman’s Landing.

Arrow has reached an agreement to acquire the project with Liquefied Natural Gas Limited (LNG), with a potential end value of $167.5 million.

Arrow will pay $51 million up front, with a further $116.5 million once various milestones are complete, subject to shareholder approval and due diligence.

But expenditures on the project and the acquisition of the Braemar 2 Power Station resulted in a $16.3 million loss for the December half, which more than offsets a seven-fold increase in EBITDA.

Scott says there are still technical issues and environmental approvals pending for the LNG project.

“For us it’s all about execution so we’ve been working very hard over the last couple of years to put in place all the building blocks for our underlying business, the LNG project. In 2010 I expect we’ll make a final investment decision on Fisherman’s Landing,” he says.

“There’s a lot of technical work going on there to make sure that we understand what it’s going to cost, that it’s actually all going to work and that we’re all comfortable with that.

“I’m very confident that we’ll have all that sorted out in the first quarter. The next leg of it is we’ve got a whole bunch of commercial arrangements that govern the rights ownerships between the parties involved.”

The environmental impact study (EIS) has been completed for the downstream part of the project and Scott expects a pipeline license to be issued soon, but the upstream EIS process is ongoing.

“We’re in the process of completing our EIS for the upstream parts but fundamentally what we’re doing in terms of the wells and facilities that we’re developing is really just expanding upon what we’ve already done,” he says.

“It’s a process that we need to go through and there’s work that we need to do to demonstrate from an environmental perspective that the proposed development and the way we deal with water and gas and so on is being managed to the best extent.”

He says recent growth has mainly come from the acquisition of the Braemar 2 Power Station last year from ERM Power.

“What it all means is that more gas is being converted into electricity and by selling it as electricity we value-add to the gas,” says Scott.

As the energy company continues its exploration operations in China, India, Vietnam and Indonesia, Scott is not fazed by current concerns surrounding Chinese economic growth levels.

“Our view would be that things are still moving along solidly, particularly in China – they really are in a position where they can’t afford to stop, they’re so far behind in terms of their growth ambitions relative to the rest of the world and where they want to be.

Scott also doesn’t seem too concerned by potential interest rate rises in 2010 either.

“Clearly it will have an impact on our funding costs and those sorts of things, but at the level we are at the moment and what we forecast for our own activity, the thing that’s more of interest to us in terms of impacting our business is exchange rate and the oil price,” he says.

“They have an impact in terms of construction costs, to the extent that we have US components of our business and obviously having a high Australian dollar exchange rate at the moment’s great.

“In terms of looking forward to 2012, 2013 and 20 years beyond when we’re going to be selling LNG based on oil price, there isn’t a forecast out there that’s less than $80 a barrel.”

AOE expects to deliver gas in Asia by 2015.

CEO: Shaun Scott
Market capitalisation: $2.4 billion
Forecast Growth ’10: 39%
Revenue ’09: $670.4 million (due to asset sales)
Profit ’09: $366 million
Staff: 506
Established: 1997