Orangie, I'll just paste the whole lot so everyone can make an...

Orangie, I'll just paste the whole lot so everyone can make an informed decision about the good and bad points. Everything below here are not my words!!!

A fund manager went and meet EWC last month and this is what they wrote...

....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...