AFR today

From where Beijing-based managing director Glenn Corrie is sitting, "the stars are aligning" for Sino Gas & Energy.

Australia's only indigenous gas producer in China is riding high on a doubling of its share price since August, thanks to surging gas demand, rising prices and momentum behind its projects that pave the way for output to roughly double every year until 2022.

Its teething problems with delays in production start-ups and payments may be behind it.

Mr Corrie describes the gas market in China as "absolutely surging", with "exceptional" growth being driven by a coal-to-gas switching program which is focused in the northern part of the country, exactly Sino Gas's target market.

Gas use across China expanded by about 20 per cent in 2017, almost triple GDP growth of 6.5 per cent, spurring local production as well as LNG imports. Demand in the north is particularly strong, supported by China's "2+26" policy, introduced in 2017, which cracks down on coal use in the Beijing and Tianjin regions and 26 other cities to improve air quality.

At about 215 billion cubic metres of annual demand, the gas market is already more than 10 times the size of Australia's, Mr Corrie noted from Chicago over the holiday break. With low all-in costs of about $US2 per unit of gas produced, Sino Gas's projects in the Ordos Basin in Shaanxi province enjoy "some of the world's highest margins", at more than $US4 per unit and "inching closer" to $US5 as price increases flow through.

Massive undertaking
Mr Corrie said that while gas is less competitive than coal, government policy now gives users no option.

"You switch or you shut down," he said, noting that forecasters including Bernstein are still forecasting a further tripling of demand by 2030 even as some coal plants close.

"There's a long way to go in terms of the switching program and you're dealing with a market at least in our region of 300 or 400 million people so it's a massive undertaking."

China's new carbon emissions trading system, announced before Christmas, will improve the competitiveness of gas against coal, he added.

Progress at Sino Gas's two projects, Linxing and Sanjiaobei, about 500 kilometres west of Beijing, have contributed to the stock's momentum. Sino Gas shares, down at 7.5¢ in August, were at 16.2¢, up 4.5 per cent, at 2:12pm AEDT.

This week came the news of the submission of a formal development plan for Sanjiaobei, following an earlier similar move for Linxing.

Further increase
Mr Corrie said he expected approvals for both – equivalent to a final investment decision – this first half, in line with official efforts to shorten regulatory approval times to bring on new domestic fields.

That would pave the way for a further increase in production from about 23 million cubic feet per day to an expected 40 million-42 million at the end of 2018. Average output is seen climbing from 16-18 million cubic feet a day in 2017 to reach 400 million-500 million cubic feet a day in 2022, representing some 3-4 per cent of domestic gas supply.

A new $US100 million ($128 million) debt facility from Macquarie plus cash from operations should fund Sino Gas through to free cash flow generation, expected in 2020, Mr Corrie said.

RBC Capital Markets analyst Ben Wilson, who names Sino Gas as his top pick among oil and gas small caps, has told clients that the strong macro backdrop, the funding deal and the progress on projects means the company is "primed to start closing the gap" between its trading price and its stock valuation. It has a 35¢ price target for Sino shares, based on 50 per cent of its discounted cash flow valuation which takes into account remaining risks around project approvals and production ramp-up.