Gents, Some recent research by MLynch is using an assumption of over $10/1000cft over the next five years - heres an extract - but overall the forward irr of SEH is going through the roof - previous estimates were working off $7.50 per 1000 cft;-- High transparency/oil-price link formula are key The National Development and Reform Commission (NDRC) published in detail, on 27 December 2011, a new natural gas pricing mechanism – and selected Guangdong and Guangxi as the first two provinces to introduce the mechanism. We are very excited and surprised by this bold move. The Chinese oil sector, particularly PetroChina, should benefit substantially from this reform. There are two key points in the reform: (1) it is the most transparent energy pricing system with a clear pricing formula; (2) it identifies LPG and fuel oil as the benchmark natural gas fuels to establish the oil-price link formula for determining the gas prices. Three uncertainties in the new mechanism The only major uncertainties in the new gas pricing mechanism are: (1) the announcement that the government would also consider social affordability and gas pricing formula to set the final gas prices; (2) the timeline for rolling over the new gas pricing mechanism to other provinces; and (3) whether the new gas prices would apply to new or existing volume only. While we believe these three issues are valid concerns, however, it should not dilute any reading of the commitment of the Chinese Government to move the gas prices. The long term national average gas prices might double We have developed an approach to understand what affordability means for the NDRC based on the current economic conditions. We use Guangdong and Guangxi gas prices as benchmarks. For provinces which have GDP/capita higher than Guangdong, we assume those gas prices will convert to the Guangdong prices in five years. For provinces with GDP/capita below Guangdong and above Guangxi, we assume those gas prices will convert to Guangxi prices in five years. For those provinces which have GDP/capita lower than Guangxi, we assume prices will remain at the current national average. With the above methodology, we have arrived at national average gas prices of Rmb1.9/cm (US$10.7/mcf), 76% and 33% respectively above the current realized prices and our long term gas-price assumption.
SEH Price at posting:
3.9¢ Sentiment: LT Buy Disclosure: Held
