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Sino The Times In China's Air

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Sino Gas & Energy is showing plenty of reasons why it should finally be able to break out into clear water in terms of its share price.

Anyone who has spent time in China will know that the country has to do something about the quality of its air. China knows this too, and is seeking to balance its voracious need for power with adding cleaner sources of energy to its coal-dominated mix.

This is where Sino Gas & Energy Holdings Limited (SEH) comes in.

Sino Gas & Energy - not to be confused with Chinese drilling services company Sino Australia Oil and Gas Limited (SAO), which listed on the Australian Securities Exchange (ASX) in December 2013, or the OTC (New York) - listed Chinese gas distributor Sino Gas International Holdings, Inc. (SGAS) - has joint ventures developing coal seam gas (CSG) tenements in China’s northern Shanxi province.

Sino Gas & Energy holds stakes in two production sharing contracts (PSCs), covering an area of about 3,000 square kilometres, in the Ordos Basin, China’s second-largest onshore oil and gas-producing basin. Sino Gas & Energy operates the fields in partnership with Hong Kong-listed MIE Holdings Corporation: Chinese state-owned companies China National Petroleum Corporation (CNPC) and China United Coalbed Methane Corporation (CUCBM) are also partners in the PSCs.

Sino Gas & Energy listed on the ASX in September 2009, raising $7.9 million through the issue of 31.6 million shares at 25 cents, alongside a rights issue to existing shareholders. The company had operated in Beijing through a wholly owned subsidiary since 2005.

The stock listed at a discount, and continued to sink like a stone, plunging to 2.7 cents by July 2010, before SEH began the long climb to respectability. It took until November 2013 before the issue price was reached – fleetingly – only for the stock to fall again, to its current level of 14.5 cents.

Part of that slide was a sharp fall in late March, after chief executive Robert Bearden announced that he would leave the role he had held for just two years, citing personal and family reasons.

But Sino Gas & Energy is showing plenty of reasons why it should finally be able to break out into clear water in terms of its share price.

The consensus analysts’ price target is 52 cents – implying that the stock is 72% under-valued. Looked at the other way, the analysts see scope for Sino Gas & Energy to more than triple in price.

And now that gas is flowing, investors are at last entitled to feel a bit more confident about the outlook for the price.

The gas from Linxing (SEH 64.75%) and Sanjiaobei (SEH 49%) is being converted to compressed natural gas (CNG), which consists mostly of methane. Widely recognised as a reliable and clean fuel source, CNG is a cheap and relatively clean hydrocarbon fuel that can be easily and efficiently transported by road.

Sino Gas & Energy signed a pipeline sales deal with Shanxi International Energy Group (SIEG) in June 2013, and followed that in October with a deal covering gas delivered by road. The first gas from Linxing was successfully transported by road to SIEG’s distribution facility in December.

The 2013 drilling program saw 31 wells drilled, a mixture of ‘infield’ (that is, within the established limits of the gas field) and ‘delineation’ (an appraisal, or exploratory well, seeking to define the size and extent of a hydrocarbon pool) wells across both PSCs, all of which encountered pay. More than 62,000 metres were drilled, including Sino Gas & Energy’s first horizontal well. In addition, 1,235 kilometres of seismic surveying was acquired in 2013 and interpreted.

The 2013 drilling program and seismic work was used in an independent study conducted by Australian evaluation company Risc Operations, whose report – which was released to the ASX last month – more than tripled the proven and probable (2P) gas reserves previously estimated. Risc Operations estimated the 2P reserves in Sino Gas & Energy’s two PSCs at more than 1 trillion cubic feet, up from the 327 billion cubic feet estimated in March 2013.

Risc Operations also increased the ‘best estimate’ contingent resource for the PSCs by 32% from 2.2 trillion cubic feet to 2.9 trillion cubic feet, lifting Sino Gas & Energy’s stake from 291 billion cubic feet of gas to 850 billion cubic feet.

As a result, Sino Gas & Energy’s share of the project’s expected monetary value increased by 45%, from US$1.6 billion to US$2.3 billion. That is not bad for a company capitalised at $211 million – but of course the upside is an estimate.

But at least gas is now flowing. And pipeline production is also expected to begin in 2014.

The partners are not sitting on their hands. A big drilling program is planned for 2014, both to convert more resources into reserves and to bring more of the prospective area into the discovered area. All up, 2014 is expected to see almost double the number of wells drilled from 2013. It is expected that most of the wells drilled in 2014 will flow into the early production system, which is planned to ramp up in the second half of the year and become an increasing source of cash flow for the projects.

As Sino Gas & Energy has moved along the path from exploration through development to production and cash flow, its share register has reflected the maturing of the company. SEH completed a share placement in the December 2013 quarter that raised $53 million (before issue costs), giving the company a cash position at the end of the quarter of $64 million. The placement lifted the institutional representation on the share register from 31.4% to 37.6%. That proportion was 21.3% at the beginning of 2013. (The ASX-listed global market leader in mineral survey tools and drilling mud, Imdex (IMD), owns 22.5% of SEH.)

In 2013, Sino Gas & Energy made big progress on a number of critical fronts, including field developments, government approvals, gas sales agreements, first gas shipments and drilling results. The stock responded, but lost virtually all of those gains when Bearden quit unexpectedly. Sino Gas & Energy says it is focused on “appointing a high-calibre replacement who will continue to grow the company and build shareholder value.” There should be no shortage of high-quality applicants, because Sino Gas & Energy is at a fairly exciting stage. For potential investors, the Bearden resignation and the market’s reaction to it could just have given them a nice discount into a stock that is going places.

View More Articles By James Dunn

James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au



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