great 2010 energy stock

EWC continues to form a base around the mid forties. Volume is nothing to write home about atm but should improve as the story gets around. I have been buying more recently. Still some good gains in some of the speccie stocks around the place, but I have exited nearly all mine as I think the market will become more discerning from now on and will want to see evidence of good nearterm cashflows.
In case there are some readers not familiar with the EWC story, here are some reports that might interest. Expect more brokers to pick it up from now on. (Thanks to those regular posters for originally providing these).

Below if from a ABN August 09 report


"....we met with Energy World Corporation in Hong Kong on Wednesday and came away impressed. The company has had a long and somewhat patchy past but now seem to be on the verge of a period of significant earnings growth, driven by the construction of an LNG project at their 100%-owned Sengkang gas field, in Indonesia. In a nutshell, this LNG project has the potential to increase EWC’s EBITDA from US$40-50mn now to over US$400mn by 2011. EWC is fully funded to project-completion, which is expected within the next 12 months. This compares to the company’s current market capitalization of US$775mn.
The background of EWC goes back to 1993, when the company bought the Sengkang gas field in Indonesia from BP. EWC successfully raised money to build a 135MW gas-fired power plant (still owned by EWC, and now upgraded to 195MW), using their gas field as feedstock for electricity production. As the project commissioned successfully, EWC’s share price rose from A$0.54/share at the beginning of 1996 to A$1.60/share in July of 1997, right before the Asian Crisis. The company entered a period of substantial difficulty in 1998, as the company’s project finance in Indonesia had very restrictive terms that made repatriating money out of the country nearly impossible. As a result, EWC’s corporate-level debt with CBA in Australia was unable to be serviced, and the company teetered on the brink of insolvency, with its share price falling to under A$0.02/share for much of the period between 2000 and mid-2006.
EWC’s savior turned out to be a guy named Stuart Elliott, who was a passive shareholder in the late 1990’s and ended up injecting the company with equity and loaning it enough money (personally) for the company to survive. Elliott made his fortune as the CEO of Consolidated Electric Power Asia (CEPA), which was the power arm of Gordon Wu’s Hopewell Holdings. Elliott built CEPA into one of the leading regional power producers, with operating capacity of 3,995MW across power plants in China, the Philippines, and other Asian countries. Elliott is now the CEO and Chairman of EWC, in addition to being the company’s largest shareholder (46%) and remains one of the company’s creditors (US$18mn in loans outstanding). By all accounts, Stuart Elliott is the heart and soul of the company. Among the people we have spoken with, Elliott has a reputation of being someone who knows how to “get things done.” This is a phrase that was repeated several times by different sources. Having said that, he is not a typical corporate CEO, and EWC is not a typical mid-cap Australian company. The company has no IR, no website, and no email addresses. Corporate filings are sparse, and there is virtually no sell-side coverage of the stock. This is good in the sense that the company’s seeming undervaluation can be explained, at least in part, by the fact that they are not on most investors’ radars. But it has made gathering data not a little bit difficult.
EWC’s main assets today are its Sengkang gas field in Indonesia (100% owned) and the power plant that sits next to it (95% owned). The power plant is currently 195MW, while the company has received permission from the government (which is also the plant’s offtake partner) to expand to 315MW. This plant generates approximately US$20mn/annum in cash flows and is would cost approximately US$300mn to replace, which offers a sense of the plant’s worth to EWC (39% of the market cap). The gas field has 2P reserves currently of 695bcf, and the company believes there is a resource of 2.25tcf (though this is an estimate). EWC has always had more gas than it knows what to do with—even at 315MW, the total gas needed for power production between now and 2022 is 343bcf, leaving 352bcf of extra gas with no clear use. If this gas were in Australia, it would be worth in excess of US$500mn, but because there is no clear market in which to sell the gas, it has remained undeveloped for the past 20 years.
Today, gas is not really a globally-traded commodity with uniform pricing around the world. Rather, gas prices in Europe are substantially higher than in the US, which has higher gas prices than in Australia. Most gas is used where it is produced. In a country like Australia, that has far more gas than demand for gas, prices remain low. LNG is a means by which to transport gas from one place to another, and as LNG trade increases, gas will increasingly be subject to uniform global prices. This is a ways away, however. Further, in remote parts of the world, gas assets that are not large enough to support a multi-billion dollar LNG project lie dormant—virtually worthless because of their distance from any source of commercialization as an industrial feedstock or a source of power generation. EWC’s Indonesian gas project is one such deposit. EWC’s solution to this problem is the construction of a small-scale LNG plant at Sengkan. They estimate a cost of this project of US$350mn for 2mntpa. To put this in context, Exxon’s Papua New Guinea project has a total estimated cost of US$12bn for 6.3mntpa, meaning a cost per ton of US$1.9bn versus EWC’s estimate of US$175mn! Exxon’s project is one of the cheapest globally because it is onshore, as opposed to the Australian projects on the Northwest shelf which are off-shore and even more expensive. How could this cost differential be so large? The people I have spoken with—from the company’s CFO to their main banker at Standard Chartered to an investor who has been involved with the company for over 10 years—claim that there is virtually no technology or execution risk, and the cost savings are driven by a) buying stock equipment rather than “bespoke” from Siemens and Chart, which is what most LNG producers do; b) small scale projects are cheap, but a larger gas field requires increasing capital to develop, on a per unit basis, given space constraints and the increased need to engineer projects efficiently; and c) not outsourcing the engineering and construction to an outside firm such as Bechtel, and instead doing it themselves. This is Elliott’s main area of expertise.
Assuming these economics are for real—a payback period of less than 2 years and recurring cash flow of US$400mn for a gas asset that was previously worthless—why have others not done this? The short answer is that they are now, but that the constraints to small-scale LNG are serious. The way the industry is structured, project finance is generally conditional upon long-term (20 year) take-or-pay offtake contracts, which guarantee that an LNG project’s gas has a buyer. These offtake contracts are subject to years of due diligence. For understandable reasons, counter-party risk is a key issue, and the customers in these contracts, Japanese or Korean utilities, for example, are reluctant to sign a long-term binding commitment with a company that does not have an established reputation or proven track record. Thus, the current structure of the LNG market—from what kind of plants get built to how they are financed to who buys gas from them—is skewed toward large national oil companies and their global major peers, and against companies like EWC. EWC will likely have no guaranteed offtake partners when it commences production, instead relying on sales on the (thin) spot market and ad-hoc sales to regional utilities which need additional gas, until the company’s gas and reliability are verified, at which point a longer-term contract is likely. Some industry players are understandably skeptical as to whether this will work, but long-term, the grip of the oil majors on the LNG market is almost certain to loosen. EWC has already spent US$150mn of the US$350mn project cost, and the company has cash on hand of US$218mn and about US$50mn of undrawn loan facilities.
At this point, we have acquired a small position in the company and are doing a lot more work to see if it is as good as it sounds. The upside is that if EWC proves that they can develop small scale LNG plants at a fraction of the price of the industry average today, there will be nearly inexhaustible demand for their services—from anybody who owns a stranded gas field and wants to monetize their gas. I imagine a combination of EPC fees for EWC and a slice of the equity in such projects. It turns out that the company is studying an asset in PNG owned by another of our portfolio companies, and the MD of that company confirmed the basic terms of a possible deal. The implications of success for EWC for the global gas market are clearly negative, but EWC should be able to generate outsized returns for several years in the meantime"



And another report from the RBS. This is a bit older so some of the timelines have slipped a bit. They had some difficulty securing land in Indonesia for the LNG plant so the the project is running about a year late.


"EWC is an Australian listed LNG and power infrastructure play. Its strategy is to deliver 15m tonnes of LNG into Asia: 5mtpa from Indonesia; 5mtpa from Queensland; 5mtpa from the ROW. This gas will come from its own gasfields and also from purchasing stranded gas from third parties.
CEO Mr Stewart Elliott is about to revolutionize the industry with the development of the first low cost medium sized standard modular LNG train. The idea is to bring stranded gas to market.
Each module has a 500K tonne capacity and the cost is roughly US$200m per 1mtpa capacity (2 x 500kt modules). This compares to Mitsubishis Sulawesi development costing c$700M per mtpa and WPLs Pluto at >$1,200 per mtpa. Two years ago, the likes of STO, WPL and OSH said it was impossible to modulize the process and build a train at this cost. Today they are no longer doubters.

Indonesia (Sulawesi)

Through its strategic alliance with Chart (US) and Siemens (Europe), the coy is close to accepting delivery of equipment for its first 500mt train in Indonesia, with first gas expected late Dec quarter ‘09. Every quarter thereafter the coy plans to add an additional 500mtpa module. The coy has ordered and paid for the first 1st 4x500tpa modules.
As a rule of thumb, every 1mtpa delivers US$300m EBITDA at a $12/mmbtu gas price ($50 oil); EBITDA margins are c50%. On reserves proven to date the coy has the gas to deliver 2mtpa for 5 years out of Indonesia although early studies indicate potential reserves of 5-7tcf from its Sulawesi field. As the reserve base gets proven up the coy plans to increase the train capacity to 5mtpa out of Indonesia. The cashflow from the project will fund future capex needs for this market.
Traditionally, gas field owners prove up the gas first and then seek funding usually with large international utilities. The power in negotiations is with the utility because without the funding to develop a facilities or LNG plant, the gas has NO VALUE. To the confusion of industry, EWC has worked backwards. It has enough gas and cash to get 2mtpa for 5years in Indonesia; and the cashflow from this facility will fund further drilling which commences next month.
EWC is likely to sell a portion of its LNG to the Indonesians at current spot prices and also enter a deal with one of the Japanese utilities. Elliot is reluctant to rush into an output deal unless it is on his terms. LNG buyers do not just want output, they want an equity position in the coys existing projects and an option to participate in future projects. It is pricing this option in the case of EWC that is proving a challenge given the upside that could exist in Queensland, however the coy believe by July a deal will be done with both the Indonesia Govt and also an Asian based utility.

Indonesia Power Plant: (Sulawesi)

Current Capacity: 195 MW, this is to be increased to 315MW in 2x60MW increments, expected to be completed by early 2010. Current earnings from 195 MW of power production are circa US$70m EBITDA and this is forecast to jump to approx US$120m when the power plant is fully expanded to 315MW.

Australia

While the coy remains focussed on Indonesia in the short-term, Elliott is aggressively pursuing his Queensland rollout. As the big boys fall over themselves in Gladstone, Elliott is 200km north at Abbot Point. Its early days but the coy is planning to construct a $1bn pipeline known as the Queensland Gas Highway which runs from Abbot Point to the Cooper basin; a port and LNG facility and a power station. To date the coy has received preliminary approvals/licenses for the port and the highway.
Gas supply will be via EWCs owned and operated gas fields at Eromanga and from 3rd party players in the Bowen Basin. As with Indonesia, Elliot will be utilizing his revolutionary low cost modulized LNG train in Qld which costs cUS$200m per 1tpa. From Queensland, the target is 2mtpa by 2012 moving to 5mtpa by 2015.
In effect, Indonesia will be seen as a test case for all EWCs future projects: gas field, LNG facility and power plant utilizing its low cost medium sized, modulized LNG train.

Discussions continue with the Abbott Port Authority to build a 450MW power plant.

Construction of the pipeline: Tenders have been received which put a $500m cost on the 950km pipeline well under the coys original budget. Rollout will be 3kms a day. The coy has also received numerous expressions of interest from parties interested in taking an equity position in the pipeline. It is not the intention to tap equity markets for funding. On the coys estimates the ROE for the Queensland project is 50%

In addition to buying 3rd party stranded gas, EWC owns what could in time prove to be pretty significant reserves in the Cooper Basin. Some very preliminary studies at its Eromanga Gas field have indicated a range of 19.6 tcf to 96 tcf. Further testing is currently underway.

Valuation

RBS are currently in the process of re-initiating coverage. Worth noting that analysts valuation from last June for the gas and LNG facility in Indonesia is $1.30 (assuming $7.3 unit gas price and 2mtpa for 5years out of Indonesia), this increases to $1.98 for 2mtpa for 10years; $3.93 for 5mtpa for 10years. This puts no value on the power plant currently earning circa US$70mpa EBITDA for 195MW (Indonesia) and no value on Queensland.

Catalysts for 2009:

1. Signing an output/equity ownership deal with International utility, expected by July

2. 1st gas out Indonesia

3. Proving up further gas reserves in Indonesia and Queensland

Stock has been a victim of the market meltdown and while it has rebounded off its low and is up 136% this year, the share price is significantly below the $1.30 valuation that my analyst put on 2mtpa for 5years in Indonesia last June.

When Indonesia it up and running in Dec 09, the coy will move forward with Queensland It is our view, this will be a significant re-rating point, as the Australian market starts putting QLD CSG PEs on EWC rather than the current 4X FY10 and 2.5X Fy11 that it is currently trading on."