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Is now the time to buy Comet Ridge Ltd (ASX:COI) shares?

Shares in Australian small cap energy company Comet Ridge Ltd. (ASX: COI) have performed impressively this year, up almost 50% since January to $0.355 per share.

In July, Comet’s shares even briefly broke through the $0.40c barrier – a feat the company hasn’t managed since late 2009, not long after it first listed on the ASX.

Comet Ridge focusses exclusively on coal seam gas.

This is a form of natural gas which is stored in coal beds located at relatively shallow depths below ground. It is an “unconventional” gas, a classification which refers to the type of geological rock the gas is found in.

While conventional gas reservoirs are typically found in sandstone and stored at high pressure beneath the earth, unconventional gas stores are trapped underground by water pressure. In order to extract it invasive and sometimes controversial methods such as hydraulic fracturing, or “fracking”, are often used.

The gains in Comet Ridges’ share price have been driven by a series of successful quarters’ worth of activities. The company is particularly excited by developments at its Mahalo project near Gladstone in Queensland, where one of its gas wells is outperforming expectations. According to its most recent quarterly activity report, from June 2018, the well is now producing 1.4 million standard cubic feet of gas per day.

A number of large players in Australia’s oil and gas sector have sizeable stakes in Mahalo, so it is a way for Comet Ridge to prove it can engage with the industry leaders. Comet Ridge owns 40% of the Mahalo project, with the remaining 60% split evenly between Australian gas major Santos Ltd (ASX: STO) and Australia Pacific LNG (APLNG).

APLNG is a joint venture between Origin Energy Ltd (ASX: ORG), American multinational energy corporation and Fortune 500 company ConocoPhillips and Chinese oil and gas giant Sinopec. It is Australia’s largest producer of coal seam gas.

All this is to say that, for a small cap energy producer, Comet Ridge is rubbing shoulders with some pretty illustrious company. And this may be a big reason for the recent uplift in its share price.

The partnership at Mahalo sends a positive message to the market: if these international giants are willing to invest their cash and resources into the project, then there must be some real potential there.

But other developments have also helped stir up some added market interest. Comet Ridge, which owns and operates a number of other coal seam gas projects in Queensland and New South Wales, announced last week that it had successfully completed a $17.4 million institutional placement.

The cash injection should allow it to continue to pursue new gas exploration opportunities while advancing drilling operations at Mahalo as well as drilling and testing at its Galilee Basin project, not far from Rockhampton in Queensland.

Foolish takeaway

Any stock that surges over 50% in a matter of months is worth taking a look at, and with demand for gas as a source of energy tipped to increase there are reasons to be excited about Comet Ridge.

However, an investment in a pure play gas company like Comet Ridge does also require an understanding of the vagaries of global commodities markets.

If a giant like BHP Billiton Limited (ASX: BHP) can be caught out when global oil and gas prices go sour – as happened when it bought its US shale assets back in 2011 – what hope is there for us everyday investors?

Taken together with its small market capitalisation, current lack of profitability, and the environmental and ethical quagmire that is fracking, I would be more inclined to give this one a miss.

Investors who are more bullish on global gas prices and want some exposure to this commodity might do better to look to a company with a more diversified portfolio of conventional and unconventional onshore and offshore gas projects like Adelaide-based Beach Energy Ltd (ASX: BPT).

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Motley Fool contributor Rhys Brock has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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