It's a buy

Event

• Sino Gas Energy (SEH) has announced that it has commenced production from the Sanjaobei (SJB) Central Gathering Station with the initial production of c.3.5mmcf/d from a pool of 16 pilot wells. Production will be ramping up to a full plant capacity of c.8mmcf/d in 2015.

• Most notable is that SEH has achieved very attractive prices of up to US$9.50/mcf for its pilot gas, significantly higher than the US$7/mcf announced on 26 June 2013.

• Pilot production will increase to 25mmcf/d in 2H-2015 with the commissioning of the 17mmcf/d capacity Linxing Central Gathering Station in mid-2015.

• The Gas Sales Agreement (GSA) was made with Lin Country Jinhao New Energy Company Limited, a Shanxi industrial and commercial customer, for distribution via the Yulin-Jinan regional pipeline.

Operations Updates:

• Excellent flow rates from both horizontal wells:

• In late October, SEH successfully delivered a second horizontal well that achieved a sustained flow-rate of 3.7mmcf/d. The well was subsequently shut-in and suspended as a future producer. The first horizontal well was complete in July 2014 with a test flow-rate of 4.93mmcf/d.

• Work continues to progress well on the Linxing Central Gathering Station. Contruction of the infield gathering lines is underway, including connection to the first horizontal well. The Lingxin station is scheduled to be commissioned in mid-2015, allowing the ramp-up of production to continue.

• Financial Position:

• Cash: US$50m

• Debt: US$10m

• Credit facility: US$40 (undrawn)

• During October, the Company contributed US$6.1m (US$10.7m YTD) for cash calls relating to the qualifying expenditure of the PSCs.

• Fully funded drilling program for 2015 (US$45-$50m net to SEH) - Sino plans to drill 31 wells in 2015:

• 8 exploration wells;

• 20 development wells, and

• 3 horizontal wells.

Plenty of catalyst in the next 6 months

• Submission of the Chinese Reserves Reports (CRR) to the Chinese Government by year end 2014. The CRR for Linxing West and Sanjiaobei are being finalised for PSC partner review, prior to the formal submission to MOLAR.

• Ramping up SJB production to 8mmcf/d in early 2015.

• Updating and upgrading reserves and resources around February-March 2015.  SEH has drilled over 30 wells in the past year which all encountered gas. Besides proving up the acreage, some of these wells will become production wells at later stages.

• Commissioning of the Linxing Central Gathering Station in June-July 2015.

• Approval of the CRR in 3Q-2015.

Impact

• This event marks a major milestone in the commercialisation of SEH’s large reserves and resources base as well as demonstrating the Company’s ability to deliver the project and giving it a significant source of cash flow.

• SEH’s assets can provide significant value to shareholders over the next 12 months as confidence in operations improves with time and cash flows become significant. This is an historic turning point in the Company’s history as investors now own a production company with large reserves and resources in the energy hungry China.

• The pilot production program is expected to generate AU$15-20m in revenue net to SEH in 2015.