sino gas - patersons 21 03 2013

7/28/2019 Sino Gas - Patersons 21 03 2013

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RESEARCH NOTE PATERSONS SECURITIES LIMITED 1

All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibilityor liability on any account whatsoever on the part of this firm or any member or employee thereof.

RESEARCH NOTE

SINO GAS & ENERGY HOLDINGS LTD

Sino Gas & Energy (SEH) has announced a significant increase in2P reserves to a gross 327bcf from 22bcf following the release ofthe updated 2013 Independent Resource Report from RISC.Importantly gross project reserves and resources have increasedby 56% from 3.7tcf to 5.7tcf due to increased Contingent andProspective Resources, exceeding our expectations. Theannouncement demonstrates the increased commerciality andprogressive de-risking of SEHs projects. Following this upgradewe have increased our price target to $0.45ps from $0.31psmaintaining the BUY rating.Upgraded Reserves & Resource potential +56% Total Resources:SEH has announced increased certified gross 2P reserves to 327bcf(+1386%), 2.2tcf 2C Resources (+24%) and 3.1tcf Prospective Resources(+71%). Overall SEH has announced an increase of 56% from 3.7tcf to5.6tcf in overall resources (net 1.6tcf SEH). This is significant further stepin de-risking these projects and we envisage additional reserves/resources

growth through the conversion of Resources to Reserves and furtherexploration from the full funded 25 well drilling campaign over the next

12mths as SEH moves the projects to full field development in 2014/15.25 well/fully funded development program in 2013: Thisannouncement is only the beginning of a year of catalysts for SEH. Overthe next 12 months SEH has an active fully funded development programunderway including additional seismic, 25 wells and production tests, alltargeting Chinese Reserve Reports (CRR)/Overall Development Plan (ODP)in H2 2013.Fully funded to development/Strong Chinese Partner in MIE: SEH isfully carried on its share of the development programme following thefarm-out of 51% of its Chinese projects for US$100m to MIE Holdings inmid 2012.These funds will be sufficient to fund SEHs capex programme to2014, taking the projects to CRR and ODP.SEH has high retained interests and 50% of its acreage remains

unexplored: SEH has high retained interests of 32%/24% for the Linxingand Sanjiaobei PSCs which provides material upside as the projects moveinto the full field development phase. Importantly 50% of its acreage isunexplored.We re-iterate our Buy rating and have increased our price target to$0.45ps from $0.31ps due to the increased resource potential onthe projects reflecting the upgraded reserves report. Our buy ratingis predicated on near term development of gross 5.7tcf resources,attractive well economics, high retained interests, projects located close tonearby infrastructure and proposed reform of Chinese gas prices.Key Catalysts: 25 well programme Q3 2013, Chinese CRR & ODP in 2H2013, Chinese Gas prices reform in 2H 2013.Key Risks: Development risk, sovereign and gas price risk.

21 March 2013

12mth Rating BUY

Price A$ 0.165

Target Price A$ 0.45

12m Total Return % 171.3

RIC: SEH.AX BBG: SEH AUShares o/s m 1238.6

Free Float % 73.6

Market Cap. A$m 204.4

Net Debt (Cash) A$m 31.1

Net Debt/Equity % 0

3m Av. D. Tover A$m 0.13

52wk High/Low A$ 0.17/0.06

Valuation:

Methodology NPV

Value per share A$ 0.53Analyst: Alexis Clark, CFA

Phone: (+61 3) 9224 4448

Email: [email protected]

12 Month Share Price Performance

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Volume(million)

SharePrice($)

12 Months

Performance % 1mth 3mth 12mth

Absolute 42.6 51.6 148.7

Rel. S&P/ASX 300 46.8 54.9 186.2

Sino Gas delivers once again Reserves upgrade

Year End Dec 31 2010A 2011A 2012F 2013F 2014F

Reported NPAT ($m) (4.4) (3.9) (3.9) (1.2) 10.2

Recurrent NPAT ($m) (0.5) (4.0) (4.3) (1.2) 10.2

Recurrent EPS (cents) (0.6) (0.4) (0.4) (0.1) 0.8

EPS Growth (%) na na na na na

PER (x) (27.6) (43.1) (43.2) (168.2) 20.7

PEG na na na na na

EBITDA ($m) 0.4 (3.7) (4.3) (1.0) 14.3

EV/EBITDA (x) 267.2 (45.8) (41.4) (200.5) 15.9

Free Cashflow (6.6) (10.9) (10.8) (0.6) (29.6)

FCFPS (cents) (0.9) (1.1) (1.0) (0.0) (2.3)

PFCF (x) (18.4) (15.7) (17.2) (355.9) (7.1)

DPS (cents) 0.0 0.0 0.0 0.0 0.0Yield (%) 0.0 0.0 0.0 0.0 0.0

Franking (%) 0.0 0.0 0.0 0.0 0.0


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21 March 2013 Sino Gas & Energy Holdings Ltd



Reserve/Resource Upgrade significant increaseSEH has announced increased certified gross 2P reserves to 327bcf (+1386%), 2.2tcf 2CResources (+24%) and 3.1tcf Prospective Resources (+71%) following the updatedIndependent Assessment from RISC. This is a significant increase and the announcementdemonstrates the increased commerciality and progressive de-risking of SEHs projects which we

believe the market does not yet fully appreciate. The last update from RISC was in January 2012and this update has been prepared on the basis of the 12 wells drilled in 2012 and 370km ofadditional seismic data on the Sanjiaobei and Linxing PSCs.

Overall, SEH has announced an increase of 56% from 3.7tcf to 5.6tcf in total resources. Wewere expecting an increase in the 2P reserves as this was largely infill drilling on SEHs PSCs,however the size of the increase was greater than expected. The increase in Contingent &Prospective resources significantly exceeded our expectations and is due to the additionalseismic work completed in 2012 on previously unexplored acreage. New SEH management havedelivered in a short space of time with a farm-down ensuring the projects are fully funded andnow, a significant increase in reserves and resource potential on the blocks.

Key points on the announcement are as follows:

Total un-risked mid-case reserves & resources has increased 56% to 5.7 Tcf, net SEH shareat 1.6 tcf1386% increase in gross 2P Reserves to 327bcf (from 22bcf) with net SEH share at 93 bcf24% increase in total project 2C Contingent Resources to 2.2 tcf (from 1.7tcf) (net SEH653bcf)71% increase in total project Prospective Resources to 3.2 tcf (from 1.8tcf)(net SEH 885bcf)Net mid-case project NPV for SEH as determined by RISC has increased 66% fromUS$1.1bn to US$1.9bn with a risked valuation of US$1.5bn. The higher valuation is due tothe larger resource base, refinements to SEHs development models and strengthening gasprice forecasts in China. We value the projects at approximately $740m so there issignificant upside to our conservative valuation.

Figure 1: Updated RISC Reserve & Resource Report

Source: SEH Announcements


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25well/fully funded work program in 2013SEH has an active near-term work program on its Chinese projects in 2013. In a recent operationalupdate SEH highlighted the program underway includes 2D seismic, up to 25 wells, production testsand targeting pilot gas projects and Chinese Overall development plan and Reserve Reports in 2013on both projects. SEH will have 10 rigs operational on the PSCs in Q2 2013 and up to 25 wells

completed by the end of Q3 2013. Importantly the resource estimate announced today only relatesto 50% of the acreage as 50% remains unexplored so significant upside potential remains on theblocks.

Across the PSCs a number of wells have been drilled and intercepted between 9-17 pay intervals ineach well wells will now be dewatered, perforated and fracced in the forthcoming months. SEHwill then conduct flow tests to incorporate the results in the Chinese Reserve Report process. Thisprocess is akin to moving the projects to Final Investment Decision. In addition to this SEH will bedrilling up to 4 exploration wells by mid 2013. First gas from pilot projects is targeted for 2H 2013with commercial production targeted for 2014 on both projects.

Key CatalystsCatalyst Timing

Sanjiaobei & Linxing West drill programme Q2 2013

Linxing East - Chinese CRR & Pilot Production Q3 2013

Sanjiaobei - Chinese CRR Q4 2013

Pilot Gas projects 2H 2013

Reform to ChineseGas prices. 2H 2013/H1 2014

Key RisksProduction rates: SEH is targeting significant production growth and any delays to developmentdrilling and low well flow rates would impact our forecasts.

Funding risks: Post the MIE farm down SEH is fully funded for the appraisal programme to reachChinese Reserve Report and Overall Development Plan submission. SEH will however need to raise

funding for full field development of the projects from 2014 onwards. By 2014, SEH should havesignificant 2P reserves booked and reserve based lending facilities should be available to financethis stage of the project. There are already a number of ASX listed E&P companies operating inChina who have reserve based lending facilities in place, secured against 2P reserves.

Development risks: As with any resource development project there is the risk that thedevelopment does not proceed according to plan. Timing, capital costs, reserve risks and access toinfrastructure can negatively impact earnings and valuation.

Sovereign Risk: There is the risk of altered terms on the PSC from the Chinese government,although there is a long standing and established practice of the Chinese government honouring theterms of PSCs. Recent confirmation of transfer of ownership interest in the Sanjiaobei PSC by theChinese government recognising the transfer from Chevron to Sino and their PSC partners was apositive development and goes someway to mitigating this risk.

Standard oil & gas industry risks: Commodity prices, exchange rates, exploration, developmentand production operating risks. SEH has no gas price or exchange rate hedging in place.


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High Demand and China needs the gasSignificant population/extensive infrastructure build out

Sino Gass acreage is located in Shanxi Province highlighted in Figure 2. The province has apopulation of 33 million and includes 11 cities and 119 counties and districts. The capital of the

province is Taiyuan with a population of 4.2m and there are 8 cities in the province with apopulation over 3m people. The population and demand for energy in the Shanxi Province whereSino's acreage is located is significant. Urbanisation is an unstoppable trend and the infrastructurebuild out is significant. There are multiple apartment towers of 40 story plus and numerous bridgesand roads under construction. As a result of this growth and the high usage of coal, airquality is low in the province.Chinas 12th five year plan focuses on energy efficiency and theuse of cleaner energy sources such as natural gas as the fuel of choice for power generation, busand truck fleets and for powering the boiler network which provides heat for the cities. This is aconcerted and serious government effort.

Pipeline infrastructure in-place

Figure 3 detailed below outlines the location of SEHs acreage in the Ordos Basin in China ashighlighted in yellow (Sanjiaobei and Linxing PSCs). The figure also shows other operatorsproducing in the region and the significant pipeline infrastructure crossing the Sino block and linkinginto large population centres.The Chinese government has been aggressively investing in pipeline

infrastructure over the last 10 yrs which has opened up the transportation of Chinas natural gassupplies in order to transport inland domestic gas to the coastal cities and opened a new stage inthe evolution of Chinas natural gas market, from that of a local business to a nationwide business.

Figure 2: China Ordos Basin SEH Acreage Figure 3: Shanxi Province

Source: China Websites Source: SEH Presentations

Chinese gas price reform and government initiatives

In late 2011 the Chinese government announced the commencement of reforms to Chinese gasprices so that they are subject to market based pricing based on a reference basket of importedfuel oil and LPG. Whilst still early days, this is a positive step in linking domestic and import priceswith the potential of gas prices reaching US$10mcf/d vs current US$7mcf/d. This reform hascommenced in two provinces at this stage and is expected to be rolled out to other provinces in thenear term. China is the most important country shaping the future of global energy markets and itsexisting energy demand and its potential for economic growth means that its policy choices willdramatically affect global gas demand. Chinas 12th five year plan for the period 2011-2015,focuses on energy efficiency and use of cleaner energy sources such as natural gas setting a targetfor natural gas of 8.3% of the primary energy mix by 2015 from 3.8% in 2008. Generatingproduction from all sources of domestic unconventional gas is a critical part of this plan. SinosPSCs are specifically designated to be fast tracked by the Chinese authorities.
http://en.wikipedia.org/wiki/Taiyuanhttp://en.wikipedia.org/wiki/Taiyuan


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Sino Gas & Energy Holdings Limited $0.17 Year End December 31

Valuation A$m A$/sh Commodity Assumptions 2010A 2011A 2012F 2013F

Linxing PSC - 2P & 2C 442 0.35 US$/A$ 0.93 1.03 1.03 1.01

Sanjiaobei PSC - 2P & 2C 211 0.17 RMB:US$ 6.60 6.45 6.08 6.00

Prospective Resource Upside 93 0.07 Crude Oil - WTI (USD/bbl) 79.74 93.08 94.46 97.62

Cash 19 0.01 Sales Gas Price - USD 6.86 7.10 7.75 8.06

Corporate (45) (0.04)

Debt (50) (0.04) Production Summary 2010A 2011A 2012F 2013F

Unpaid capital 3 0.00 Linxing PSC 0.00 0.00 0.00 0.14Total @ 10% Discount Rate 673 0.53 Sanjiaobei PSC 0.00 0.00 0.00 0.33

Price Target 85% 0.45 Total (bcf) 0.00 0.00 0.00 0.46

Linxing PSC 0.00 0.00 0.00 0.38

Price Target Sensitivity -10% 0% +10% Sanjiaobei PSC 0.00 0.00 0.00 0.89

Gas Price Sensitivity (A$/sh) 0.46 0.53 0.60 Total (mmscf/d) 0.00 0.00 0.00 1.27

Exchange Rate Sensitivity (A$/sh) 0.57 0.53 0.49

Valuation Summary of Operating Assets Profit & Loss (A$m) 2010A 2011A 2012F 2013F

Sales Revenue 0.0 0.0 0.0 3.7

Other Income 2.0 (0.5) 0.2 0.6

Operating Costs 0.0 0.0 0.0 0.5

Exploration Exp. 0.0 0.0 0.0 0.0

Rolayties 0.0 0.0 0.0 0.0

Corporate/Admin 1.6 3.1 4.5 4.8

EBITDA 0.4 (3.7) (4.3) (1.0)

Depn & Amort 0.0 0.1 0.0 0.2

EBIT 0.4 (3.7) (4.3) (1.1)Interest 0.9 0.3 0.0 0.0

Operating Profit (0.5) (4.0) (4.3) (1.1)

Abnormals Pre-Tax (3.9) (0.1) (0.4) 0.0

Tax expense 0.0 0.0 0.0 0.1

Minorites 0.0 0.0 0.0 0.0

Other 0.0 0.0 0.0 0.0

Production Summary NPAT (4.4) (4.0) (4.7) (1.2)

Normalised NPAT (0.5) (4.0) (4.7) (1.2)

Cash Flow (A$m) 2010A 2011A 2012F 2013F

Adjusted Net Profit (0.5) (4.0) (4.7) (1.4)

+ Interest/Tax/Expl Exp 0.9 0.3 0.0 0.1

- Interest/Tax/Expl Inc 5.4 8.4 (0.2) 0.1

+ Depn/Amort 0.0 0.1 0.0 0.2

+/- Other (1.7) 1.1 (1.8) 0.0

Operating Cashflow (6.6) (10.9) (6.3) (1.2)

- Capex (+asset sales) 0.0 0.0 0.0 (0.5)- Working Capital Increase 0.0 0.0 0.0 0.0

Free Cashflow (6.6) (10.9) (6.3) (0.7)

- Dividends (ords & pref) 0.0 0.0 0.0 0.0

+ Equity raised 23.6 7.0 2.4 10.0

+ Debt drawdown (repaid) (13.6) 0.0 0.0 0.0

+ Other (0.1) (0.0) 7.1 0.0

Net Change in Cash 3.3 (4.0) 3.1 9.3

Exchange rate effects (0.8) 0.0 (0.0) 0.0

Reserves & Resources Cash at End Period 8.3 4.3 7.4 16.7

Reserves - as at Mar 2013 Oil/Cond Gas Total Net Cash/(Debt) 8.3 4.3 7.4 14.0

Net Reserves (mmbbl) (bcf) (mboe)

1P 0 32 5.3 Balance Sheet (A$m) 2010A 2011A 2012F 2013F

2P 0 94 15.7 Cash 8.3 4.3 7.4 14.0

3P 0 199 33.2 Total Assets 37.4 44.4 52.0 57.9

Total Debt 0.0 0.0 0.0 0.0

2C Contingent Resource 0.0 653 108.8 Total Liabilities 6.3 8.9 13.6 13.6

P50 Prospective Resource 0.0 885 147.5 Shareholders Funds 31.1 35.5 38.4 44.3

Directors Ratios

Name Position Net Debt/Equity (%) na na na na

Gavin Harper Executive Chairman Interest Cover (x) na na na na

Robert Bearden Managing Director & CEO Return on Equity (%) na na na na

Bernie Ridgeway Non-Executive Director

Peter Mills Non-Executive Director Substantial Shareholders Shares (m) %

Colin Heseltine Non-Executive Director Imdex Ltd 251.9 20.3

SHL Pty Ltd 77.2 6.2

Linxing PSC -

2P & 2C

Sanjiaobei PSC

- 2P & 2C

Prospective

Resource

Upside

Cash

0.00

2.00

4.00

6.00

8.00

10.00

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2010A 2011A 2012F 2013F

Prod

uction(

bcf)

Sanjiaobei PSC Linxing PSC Sales Gas Price - USD


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Recommendation History

B

SB SBSB

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Volume(million)

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12 Months

Date Type Target Price Share Price Recommendation Return

21 Mar 12 Research Note 0.25 0.08 B

04 Jun 12 Event Impact Email 0.25 0.07 SB -10.3%

27 Jun 12 Research Note 0.31 0.08 SB 7.1%

24 Sep 12 Event Impact Email 0.31 0.06 SB -20.0%

30 Oct 12 Event Impact Email 0.31 0.07 SB 16.7%

Current Share Price 0.16 128.6%

Stock recommendations: Investment ratings are a function of Patersons expectation of total return (forecast price appreciation plusdividend yield) within the next 12 months. The investment ratings are Buy (expected total return of 10% or more), Hold (-10% to +10%total return) and Sell (> 10% negative total return). In addition we have a Speculative Buy rating covering higher risk stocks that may notbe of investment grade due to low market capitalisation, high debt levels, or significant risks in the business model. Investment ratings aredetermined at the time of initiation of coverage, or a change in target price. At other times the expected total return may fall outside of

these ranges because of price movements and/or volatility. Such interim deviations from specified ranges will be permitted but will becomesubject to review by Research Management. This Document is not to be passed on to any third party without our prior written consent.


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All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility

sino gas - patersons 21 03 2013

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