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RESEARCH NOTE
BUY
0.165 0.45 171.3
BBG: SEH AU m 1238.6 % 73.6 A$m 204.4 A$m 31.1 % 0 0.13 A$m A$ 0.17/0.06
Valuation:
Methodology Value per share A$ NPV 0.53
Year End Dec 31 Reported NPAT ($m) Recurrent NPAT ($m) Recurrent EPS (cents) EPS Growth (%) PER (x) PEG EBITDA ($m) EV/EBITDA (x) Free Cashflow FCFPS (cents) PFCF (x) DPS (cents) Yield (%) Franking (%)
2010A (4.4) (0.5) (0.6) na (27.6) na 0.4 267.2 (6.6) (0.9) (18.4) 0.0 0.0 0.0
2011A (3.9) (4.0) (0.4) na (43.1) na (3.7) (45.8) (10.9) (1.1) (15.7) 0.0 0.0 0.0
2012F (3.9) (4.3) (0.4) na (43.2) na (4.3) (41.4) (10.8) (1.0) (17.2) 0.0 0.0 0.0
2013F (1.2) (1.2) (0.1) na (168.2) na (1.0) (200.5) (0.6) (0.0) (355.9) 0.0 0.0 0.0
2014F 10.2 10.2 0.8 na 20.7 na 14.3 15.9 (29.6) (2.3) (7.1) 0.0 0.0 0.0
18 16
14
Volume (million)
1
12 10
8
6 4
2
0
Performance %
Absolute Rel. S&P/ASX 300
1mth
42.6 46.8
3mth
51.6 54.9
12mth
148.7 186.2
RESEARCH NOTE PATERSONS SECURITIES LIMITED 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 or liability on any account whatsoever on the part of this firm or any member or employee thereof.
21 March 2013
Overall, SEH has announced an increase of 56% from 3.7tcf to 5.6tcf in total resources. We were 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 additional seismic work completed in 2012 on previously unexplored acreage. New SEH management have delivered in a short space of time with a farm-down ensuring the projects are fully funded and now, 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 share at 1.6 tcf 1386% increase in gross 2P Reserves to 327bcf (from 22bcf) with net SEH share at 93 bcf 24% increase in total project 2C Contingent Resources to 2.2 tcf (from 1.7tcf) (net SEH 653bcf) 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% from US$1.1bn to US$1.9bn with a risked valuation of US$1.5bn. The higher valuation is due to the larger resource base, refinements to SEHs development models and strengthening gas price forecasts in China. We value the projects at approximately $740m so there is significant upside to our conservative valuation.
Figure 1: Updated RISC Reserve & Resource Report
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 or liability on any account whatsoever on the part of this firm or any member or employee thereof.
21 March 2013
Key Catalysts
Catalyst Sanjiaobei & Linxing West drill programme Linxing East - Chinese CRR & Pilot Production Sanjiaobei - Chinese CRR Pilot Gas projects Reform to Chinese Gas prices. Timing Q2 2013 Q3 2013 Q4 2013 2H 2013 2H 2013/H1 2014
Key Risks
Production rates: SEH is targeting significant production growth and any delays to development drilling 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 reach Chinese 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 have significant 2P reserves booked and reserve based lending facilities should be available to finance this stage of the project. There are already a number of ASX listed E&P companies operating in China 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 the development does not proceed according to plan. Timing, capital costs, reserve risks and access to infrastructure 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 the terms of PSCs. Recent confirmation of transfer of ownership interest in the Sanjiaobei PSC by the Chinese government recognising the transfer from Chevron to Sino and their PSC partners was a positive development and goes someway to mitigating this risk. Standard oil & gas industry risks: Commodity prices, exchange rates, exploration, development and production operating risks. SEH has no gas price or exchange rate hedging in place.
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 or liability on any account whatsoever on the part of this firm or any member or employee thereof.
21 March 2013
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 or liability on any account whatsoever on the part of this firm or any member or employee thereof.
21 March 2013
Valuation Linxing PSC - 2P & 2C Sanjiaobei PSC - 2P & 2C Prospective Resource Upside C ash C orporate Debt Unpaid capital Total @ 10% Discount Rate Price Target
Source: Patersons Estimates
A$/sh 0.35 0.17 0.07 0.01 (0.04) (0.04) 0.00 0.53 0.45
Reserves & Contingent Resources: Our valuation is based on a DCF of full field development of the 2P Reserves and 2C Resources risked at 40%. We have risked these valuations to take into account the inherent uncertainties such as production timing and capex delays and over runs. Assumes recoverable 2C resources & 3P reserves of 2.9 tcf gross (0.9 tcf net SEH) in the Linxing and Sanjiaobei PSC fields. Individual well economics are attractive with the following key assumptions used: Average cost per well estimated to be US$2.1m (including drilling, fraccing and tie-in). Production life: Individual wells modelled at EUR of 2bcf per well and decline rate of 12% p.a. 30+yr production with steady state production of 200mscf/d (average both projects). Gas price: US$7.0/mcf (subject to local Chinese gas price regulations) and Lifting costs: US$2/mcf Prospective resources: We have used an Expected Monetary Value approach to value the prospective resources, which is an industry standard methodology. This methodology involves calculating a theoretical success value, weighting it by the assessed probability of success and subtracting well costs. All wells should have a positive EMV or they should not be drilled. We have risked this valuation at 15%. Assumes recoverable net 3C resources of 3.2tcf gross (0.9tcf net SEH) in the Linxing and Sanjiaobei PSC fields. Other: The NPV of corporate overhead, cash and net debt are added to the valuation. We have valued SEH on a fully diluted basis, assuming the current shares on issue of 1.23bn shares plus the exercise of 38m options resulting in fully diluted shares on issue of 1.27bn shares. We have removed the assumption of a further equity raising to fund the capex program following the MIE farm-in and assumed a $50m reserve based lending facility to fund SEHs share of development capex on the projects. We believe these assumptions are reasonable as we have attributed a conservative success rate to SEHs significant resource potential (i.e. we have heavily discounted SEHs resources implying further upside to our conservative forecasts in the event of successful development.) The increasing likelihood of the successful development of these projects and a re-rating of SEH is likely in our view. The potential upside valuation case, based on de-risking the Contingent and Prospective resources results in valuation of $1.71ps for SEH.
All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of this firm or any member or employee thereof.
21 March 2013
Sino Gas & Energy Holdings Limited Valuation Linxing PSC - 2P & 2C Sanjiaobei PSC - 2P & 2C Prospective Resource Upside Cash Corporate Debt Unpaid capital Total @ 10% Discount Rate Price Target Price Target Sensitivity Gas Price Sensitivity (A$/sh) Exchange Rate Sensitivity (A$/sh) Valuation Summary of Operating Assets
$0.17 A$m 442 211 93 19 (45) (50) 3 673 85% -10% 0.46 0.57 0% 0.53 0.53 A$/sh 0.35 0.17 0.07 0.01 (0.04) (0.04) 0.00 0.53 0.45 +10% 0.60 0.49 Commodity Assumptions US$/A$ RMB:US$ Crude Oil - WTI (USD/bbl) Sales Gas Price - USD Production Summary Linxing PSC Sanjiaobei PSC Total (bcf) Linxing PSC Sanjiaobei PSC Total (mmscf/d) 2010A 0.93 6.60 79.74 6.86 2010A 0.00 0.00 0.00 0.00 0.00 0.00
Year End December 31 2011A 2012F 2013F 1.03 1.03 1.01 6.45 6.08 6.00 93.08 94.46 97.62 7.10 7.75 8.06 2011A 0.00 0.00 0.00 0.00 0.00 0.00 2012F 0.00 0.00 0.00 0.00 0.00 0.00 2013F 0.14 0.33 0.46 0.38 0.89 1.27
Production Summary
Profit & Loss (A$m) Sales Revenue Other Income Operating Costs Exploration Exp. Rolayties Corporate/Admin EBITDA Depn & Amort EBIT Interest Operating Profit Abnormals Pre-Tax Tax expense Minorites Other NPAT Normalised NPAT
2010A 0.0 2.0 0.0 0.0 0.0 1.6 0.4 0.0 0.4 0.9 (0.5) (3.9) 0.0 0.0 0.0 (4.4) (0.5) 2010A (0.5) 0.9 5.4 0.0 (1.7) (6.6) 0.0 0.0 (6.6) 0.0 23.6 (13.6) (0.1) 3.3 (0.8) 8.3 8.3 2010A 8.3 37.4 0.0 6.3 31.1
2011A 0.0 (0.5) 0.0 0.0 0.0 3.1 (3.7) 0.1 (3.7) 0.3 (4.0) (0.1) 0.0 0.0 0.0 (4.0) (4.0) 2011A (4.0) 0.3 8.4 0.1 1.1 (10.9) 0.0 0.0 (10.9) 0.0 7.0 0.0 (0.0) (4.0) 0.0 4.3 4.3 2011A 4.3 44.4 0.0 8.9 35.5
2012F 0.0 0.2 0.0 0.0 0.0 4.5 (4.3) 0.0 (4.3) 0.0 (4.3) (0.4) 0.0 0.0 0.0 (4.7) (4.7) 2012F (4.7) 0.0 (0.2) 0.0 (1.8) (6.3) 0.0 0.0 (6.3) 0.0 2.4 0.0 7.1 3.1 (0.0) 7.4 7.4 2012F 7.4 52.0 0.0 13.6 38.4
2013F 3.7 0.6 0.5 0.0 0.0 4.8 (1.0) 0.2 (1.1) 0.0 (1.1) 0.0 0.1 0.0 0.0 (1.2) (1.2) 2013F (1.4) 0.1 0.1 0.2 0.0 (1.2) (0.5) 0.0 (0.7) 0.0 10.0 0.0 0.0 9.3 0.0 16.7 14.0 2013F 14.0 57.9 0.0 13.6 44.3
3.00
10.00 8.00 6.00 4.00 2.00 0.00 2010A 2011A 2012F 2013F Sales Gas Price - USD Linxing PSC
Production (bcf)
Reserves & Resources Reserves - as at Mar 2013 Net Reserves 1P 2P 3P 2C Contingent Resource P50 Prospective Resource Directors Name Gavin Harper Robert Bearden Bernie Ridgeway Peter Mills Colin Heseltine
Cash Flow (A$m) Adjusted Net Profit + Interest/Tax/Expl Exp - Interest/Tax/Expl Inc + Depn/Amort +/- Other Operating Cashflow - Capex (+asset sales) - Working Capital Increase Free Cashflow - Dividends (ords & pref) + Equity raised + Debt drawdown (repaid) + Other Net Change in Cash Exchange rate effects Cash at End Period Net Cash/(Debt) Balance Sheet (A$m) Cash Total Assets Total Debt Total Liabilities Shareholders Funds Ratios Net Debt/Equity (%) Interest Cover (x) Return on Equity (%) Substantial Shareholders Imdex Ltd SHL Pty Ltd
Position Executive Chairman Managing Director & CEO Non-Executive Director Non-Executive Director Non-Executive Director
na na na
na na na
na na na % 20.3 6.2
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 or liability on any account whatsoever on the part of this firm or any member or employee thereof.
21 March 2013
Recommendation History
$0.18 $0.16 $0.14
Share Price ($)
18 16 14
Volume (million)
12 B 10 SB SB SB SB 8 6 4 2 0
12 Months
Type Research Note Event Impact Email Research Note Event Impact Email Current Share Price
Target Price Share Price Recommendation 0.25 0.25 0.31 0.31 0.31 0.08 0.07 0.08 0.06 0.07 0.16 B SB SB SB SB
Stock recommendations: Investment ratings are a function of Patersons expectation of total return (forecast price appreciation plus dividend 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 not be of investment grade due to low market capitalisation, high debt levels, or significant risks in the business model. Investment ratings are determined 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 become subject to review by Research Management. This Document is not to be passed on to any third party without our prior written consent.
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 or liability on any account whatsoever on the part of this firm or any member or employee thereof.
21 March 2013
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 or liability on any account whatsoever on the part of this firm or any member or employee thereof.