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Macquarie - Outperform With A $0.35 Target

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    Thought you guys might like this one from a Macquarie Australian Energy Sector Research Note.

    Sino Gas & Energy (Outperform, A$0.35/sh target)

     Pilot production progressing: Production from the Sanjiaobei Central Gathering Station averaged 4.1mmscf/d over December from 7 of 16 wells connected (suggesting little decline from the initial 3.5mmcf/d rate). With the second compressor station expected to be online by February, we anticipate the remaining wells will be brought on-stream, which will see the full 8mmscf/d capacity utilised (we conservatively assume a ramp-up to these levels by 2Q15). Average realisations of ~U$8.5/mmscf were at a small discount to the U$9.5mmscf contract price recently stuck with a Shanxi industrial buyer, reflecting inter-PSC tariffs (given the majority of production came from Linxing West wells rather than Sanjiaobei).

     SEH anticipates that the 17mmscf/d Linxing central gathering station will be commissioning by mid-2015 (with 30 existing wells initially supporting production). However, with compressor stations also expected to be commissioned on a stagged basis, it could be year-end before this run rate is delivered.

     With brownfield expansion of processing facilities requiring a 4-6 months lead time and given surface infrastructure is quickly becoming the bottleneck (rather than well stock or deliverability) a commitment to further expansions will be required by mid-year to provide visibility of production growth in 2016.

    Improving deliverability bodes well for reserves update: With a further 12 production tests were undertaken on a comingled basis over the last six months, average flow rates have risen by ~250% to 731mmscf/d (albeit with a shorter 23-day test period), highlighting improving well deliverability. This should bode well for the upcoming RISC reserves report due in 1Q15 (which could also incorporate results from the two horizontal wells tested and a growing 2P reserves given the number of development wells drilled last year).

    CRR submission slipping on the margin: With Chinese Reserve Reports have been submitted to PSC partners for review (for subsequent submission to MOLAR) the pace of approvals is now largely out of the SGE JV’s hands. The approvals process for the Linxing East CRR perhaps sets a relevant precedent. The original submission was made in July 2013 and, following six months of technical queries, a final submission was made in March 2014. With formal CRR approval secured in early July 2014, this highlights a process that took 12 months in its entirety. Consequently ODP on Linxing West and Sanjiaobei could slip from late 2015 into 2016, in our view.

    Maintain an Outperform and a A$0.35/sh target: With production ramping up, gas realisations confirmed and deliverability improving we continue to believe that 2015 will be a standout year for SEH as it transition into a producer.

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