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Treasure Chest: Market Misreading Sino G&E

Treasure Chest | Oct 31 2017

Brokers suggest that in focusing on disappointing production report from Sino Gas & Energy, the market has missed the far more positive news contained in the company’s quarterly update.

-Company guidance again lowered
-Positive news outweighs
-Funding cost suggests lower risk


By Greg Peel

Yesterday Australian-listed Sino Gas & Energy ((SEH)) released its September quarter update, which revealed production was down -24% quarter on quarter. Full-year production guidance was revised down for a second time. It was disappointing news and the market responded accordingly.

The production miss was due to lower than anticipated offtakes from the company’s Sanjiaobei project customer Chinalco, Macquarie points out. Sino has assured that production should improve over the December quarter, with 15-20 new wells due to come on line.

But in a report titled “Small step back, big step forward”, Macquarie alerts the market to the fact that while the production downgrade was indeed a negative, the other news within the quarterly report greatly outweighs to the positive side.

Sino G&E has submitted an overall development plan (ODP) for approval of the Linxing project earlier than expected, and is on track to submit an ODP for Sanjiaobei. The company has also secured US$100m in funding.

And that’s where the story gets interesting.

The source of the funding is Macquarie Bank. The Macquarie Equities analysts report the loan has been set at a rate of Libor plus 8.2% pre ODP approval, falling to Libor plus 6.5% post approval, in line with expectation, but pass no comment on the favourability or otherwise of the deal given the implicit conflict.

Stockbroker Canaccord Genuity is nevertheless not restricted in so doing.

Canaccord notes the cost of funding is cheaper than a number of other resource juniors have been offered recently. This suggests to the broker that the stock market is overstating Sino’s risk profile.

And that’s the way Macquarie sees it. “Despite the disappointing production downgrade,” say the analysts, “the move to a fully funded ODP is a milestone for the company and we expect to see production ramping up through Q4”. Macquarie also suggests with a deal signed with GuoHua taking effect, offtake will be less volatile and sales should thus increase.

Canaccord suggests that while the gas field is still in its early stage of production ramp-up, understanding of the asset has matured significantly. The margin of error assumed in the production guidance range remains “frustratingly wide”, Canaccord admits, but the trajectory is positive and the company’s base case economics have improved versus the broker’s previous forecast.

And notably, guidance to an expectation of being free cash flow positive as early as 2020 “came as a welcome surprise”.

As a result, Canaccord has lifted its price target on the stock to 22c from a prior 21c (current trading price ~10c) while retaining a Buy rating.

Macquarie retains an Outperform rating while leaving its 20c target unchanged.

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