RBS hosted Energy World Corporation in London last week.
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.
EWC Price at posting:
42.0¢ Sentiment: LT Buy Disclosure: Held
(20min delay)