Tag Archives: water-utilities

Arckaringa Basin Shale Provides Huge Potential For Linc Energy

Summary The Arckaringa Basin is estimated to hold billions of barrels of oil. Linc Energy has almost exclusive rights to this region and its vast reserves. The company has had a difficult time recently but has huge future potential. Introduction The Arckaringa Basin is an endorheic basin – that is a closed drainage basin that does not allow the outflow of water. Located in Southern Australia, the basin used to be seen as a giant 31,000 square mile chunk of land. That was until they discovered oil. Arckaringa Basin v. Poland – Property Correspondent The Arckaringa Basin is quite huge with the above map showing a comparison to the country of Poland. More so, the basin already has some huge mining projects in place. On the bottom right of the map you see the Olympic Dam Project, which is a mining project run by BHP Billiton. The mine area contains the world’s single largest uranium deposit and fourth largest copper deposit. Oil Discovery Before we go onwards to talking about the potential of the Arckaringa Basin and its huge oil reserves, we must first talk about the discovery of oil in the region. Oil was first discovered in the region by a company known as Linc Energy (OTCQX: LNCGY ). The company first discovered oil in the region in 2010 and then underwent further analysis of the oil it found in 2011. Current estimates for the total amount of un-risked prospective resources in the basin are at 95 billion barrels of oil equivalent. On a risked basis, based on the probability of geological success, the area is expected to have roughly 3.5 billion barrels of oil on a risked basis . Oil Location and Amount Either way you slice it, this is an impressive amount of oil for a company currently trading with a market cap of less than $100 million. Should the company manage to recover only a hundred million barrels of oil – a pittance compared to the estimated reserves, the company could earn its entire market cap back earning just $1 per barrel. More realistically assuming a 10% recovery rate and $10 per barrel (roughly half of what the majors make) that would still turn out to almost $4 billion in profit for such a small company. (click to enlarge) Arckaringa Basin Licenses and Infrastructure – Linc Energy SAPEX The above map shows the current map of the area along with the different infrastructure in place along with the locations where Linc Energy has either a petroleum exploration license or is currently in the process of applying for one. One important thing to note is the company already has most of the basin covered in terms of licenses. Linc Energy Situation Now that we have talked about Linc Energy’s stake in the Arckaringa Basin along with talking about the discovery of the formation it is now time to talk about Linc Energy’s situation specifically. Linc Energy’s stock has seen a difficult time with much fluctuation. The company saw its stocks hit highs of $43.50 per barrel in 2008 before dropping down to as low as $7.36 during the crash lows. The company then saw a broader recovery in its stock price following the 2010 discovery up to a high of $30.83 in 2011. The company then saw its share price crash down to settle at around $7 for the second-half of 2012. The company then saw a spike to $29.55 in 2013. However, since then, and continuing throughout the current oil crash, the company has seen its stock price drop down over time to recent lows of $1.30 per barrel. Invest Linc Energy has been a falling knife in terms of share prices especially over the past two years where the company has lost almost 96% of its value. However, the company has a present market cap of just $79.3 million. Much of the long-term crash has been a result of the company’s delay in investing in the Arckaringa Basin. However such a delay will not last forever. Assuming the company continues working, it will eventually start producing significant amount of oils in the region which should provide a significant boost in the company’s stock price. More so, the current oil crash has helped exacerbate the trouble that the company’s current stock price is facing. That means that the company’s stock price is artificially low even based on its current troubles and as a result, the company represents a solid investment at current prices. Conclusion Linc Energy has had a difficult time recently. However, the Arckaringa Basin where it has significant shale stakes with impressive potential for future growth. The company has taken its time developing this resource but currently has all of the necessary permits in place to properly use it (with the exception of a few that are currently in process). More so, due to other major projects in the region, significant infrastructure already exists for when the project gets running and the company can start producing oil. For investors looking for a relatively risky investment with huge potential, Linc Energy represents one great choice. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

German Government Provides Relief For RWE- But That Won’t Turn The Share Price

The planned levy on old coal plant will most likely be scrapped. RWE will see a positive impact on two sides: Most of its plant will keep running and the one that won’t will receive capacity payments. The relief bounce of the shares is justified, but the news is not enough to reverse longer term performance. The likely prospect of an absence of the coal levy is a great relief for the German generators. Contrary to previous developments, this time the biggest beneficiary is RWE ( OTCPK: OTCPK:RWEOY ). I short term relief, but prefer E.ON ( OTCQX: OTCQX:EONGY ) for longer term exposure. According to German news source ARD, the Economy Minister will drop the planned coal levy . The Ministry has said it is looking at alternative plans. Reportedly, the government is looking to mothball 2.7GW of old coal plant over a time frame of four years, in order to push forward towards its emissions reductions target. Old hard coal plant under the CHP (combined heat and power) regime would be shut first, in order to substitute that plant with gas CHP. The government would look to cover the 5.5mt shortfall against its emission reductions target through other measures, such as support for heat pumps and unspecified measures at municipalities. The Minister has said he will publish a final decision July 1st. Considering the wordings of comments by several senior government and State level officials across the coalition parties on the matter over the past couple of days, I see the likelihood as the coal levy being off the table. “Realpolitik” and industrial policy seem to have won the argument. The impact on the domestic lignite industry would have been too important to bear. Further, under energy considerations, especially security of supply and affordability, lignite is a fuel that is abundant and cheaply available from domestic sources. It is clear, that there will be another impact on affordability. The CHP repartition will increase end user prices. But so would the coal levy ad power price impact have done. Mothballing of old capacity would almost certainly hit RWE alone. It has over 7GW of coal capacity that is over 37 years old. But, on balance it might be a positive. The plant runs on very low load factors. On the other hand, the Minister has said there would be compensation for such reserve plant. RWE and Vattenfall would thus receive capacity payments. On a side note, the part of the mothballed reserve plant invites questions relating to potential capacity payments. The government has several times articulated a less than supportive position for capacity payments. And certainly, if any they might be for gas in the first instance. But these plans could be interpreted as a de facto start of a remunerated capacity reserve. With that, I see the relief bounce for RWE as justified. But we doubt that there will be any reversal of performance. For that, the structural challenges on the overall profitability of the generation business are too steep (for further detail on my fundamental views see my previous article on SA – Why RWE remains uninspiring ). Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Tenaga Nasional – Brace For Explosive Growth Of This Under Covered Electric Utility

Summary The company benefits from the growth of electricity consumption in Malaysia which is set to double in the next 15 years. Tenaga is going to increase its total capacity by 30% by the end of 2017. The regulatory landscape in Malaysia does not set any hurdles for coal fired power plants, unlike in much of the developed world. Often times opportunities lie where people tend not to look. While the current stock market valuation makes it more and more difficult to find solid companies at great prices with compelling outlooks, there are still gold nuggets to be found if one dwells deeply into the fringe areas of the market, which are poorly covered and exactly where the greatest opportunities lie in the first place. Tenaga Nasional Berhad ( OTCPK:TNABY ) is the largest electric utility company in Malaysia with about $29.7 billion in assets and total installed capacity of roughly 13,000 MW (14,000 MW if Manjung 4, which went online in April this year, is included). About 93% of the capacity is made up of coal and gas fired power plants and the remaining 7% is hydro power. The majority stake in the company is owned by the Malaysian state, as the future success of the company is of strategic importance for the South-East Asian country. The expansion of the total generation capacity is vital for the country’s economic progress. First, let’s take a look at the macro view of the Malaysian electricity market and the TNB’s position in it. Usually foreign equities trade with an inherent discount compared to companies in the U.S. and Europe with a similar asset base. This is true for TNB as well, as investors perceive higher risk considering the geographic region and the potential for political turmoil. Although as I will argue later in this article, Malaysia provides more stability for a primarily coal/gas based utility than the Unites States. Whether the perceived risks are realistic or not doesn’t matter for the stock market as the discount can stem just from the sentiment only. A researching arm of The Economist ranked Malaysia among the countries with very low risk of social unrest, while neighboring Thailand, Indonesia and Philippines received medium to high risk status. This goes to prove that one can not make generalizations about a country just because the media may portray the region as unstable. Now that we have established that the Malaysian social situation is stable enough for the utility business, it’s time to take a look at the long-term trends that provide the necessary top-down framework for the bull thesis. First, the electricity consumption per capita has been growing at a fast pace – up roughly 50% in the past 15 years as can be seen from the chart below. (click to enlarge) And another chart to complement the previous one, showing new peaks in consumption year over year. (click to enlarge) Source: Quarterly report The future outlook is positive and the growth in electricity consumption will go hand in hand with the expanding GDP of South-East Asian countries. The Economic Planning Unit (EPU) of Malaysia is projecting the current consumption of roughly 125,000 GWh to reach 315,000 GWh by 2030, essentially doubling over the coming 15 years. To reach the goal and keep up with the growing demand, the only viable option is to build more base capacity – coal and gas. The same analysis, which is based on EPU’s data, is predicting the electricity mix to remain roughly the same in face of this rapid growth. Projections of consumption and the share of electricity production per fuel type Source: Electricity energy outlook in Malaysia While many have called the political actions of the U.S government “War on Coal” and the carbon legislation is definitely pushing the electricity production to alternatives, TNB does not have this problem as Malaysia’s leadership is aware that the only way to keep up with the consumption is to aggressively invest in base power plants. These aligned goals of the Malaysian government and TNB provide a fertile ground for future growth without worries for potential regulatory scrutiny. And as gas and coal remain the goal (no pun intended), all that remains for TNB to do is to stay on the course and reap the benefits by expanding capacity – pretty straight forward. Below is a summary of TNB’s generating mix by fuel type. The Fuel Mix Source: Latest Quarterly Report The bear market in the energy sector has benefited TNB as the historically low natural gas and coal prices have brought down the input costs. With no substantial shift in the fundamentals (supply/demand imbalance induced glut is here to stay) in sight, TNB will be seeing its benefits in the form of higher margins. Even the first half of the financial year 2015 already saw a substantial improvement in EBITDA margins compared to the same period last year, up from 27.5% to 37.1%. The takeaway here is that if the primary energy prices remain at these low levels, the elevated margins are to be expected going forward. The Catalyst The company has been aggressively investing in its CapEx program and is on track to add 3,800 MW of capacity by the second half of 2017 – a 30% increase in total capacity . Given that the current capacity for Q2’15 (Dec-Feb) was roughly 13,000 MW (excluding the Manjung 4’s 1,000 MW that went online in mid April this year) and the total production was 27,197 GWh which generated a revenue of $2.86 billion (MYR/USD Exchange rate of 0.27), we can roughly estimate the impact that the extra 3,800 MW is going to have on revenues. The assumption is that the capacity utilization remains at similar levels and the revenue per unit stays roughly constant at $105 MWh ($0.105/kWh). The 30% increase in the total capacity will result in a roughly equal rise in the revenue, ceteris paribus, which translates into an extra $850 million per quarter or $3.4 billion per year. Of course, the main variable that will determine the margins and profitability is going to be fuel cost, but as stated before, the situation in the natural gas/LNG and coal markets is likely going to be a tailwind for the foreseeable future. What’s more, the current contracts allow for a tariff raise in the event of a drastic fuel cost rise as can be seen from the chart below. Tariff Breakdown Source: Q2 Report The key takeaway here is that the company is on track for massive top line growth, and given the nature of the utility business – secure revenues and long-term contracts – the bottom line margins are expected to remain at roughly the current levels, meaning that the 30% in capacity growth will show up in the EPS with minimal deviation. Below is a timeline for the projects currently under construction: (click to enlarge) Source: Company’s Presentation The Main Risks The main risk for foreign investors buying shares in the company is the exchange rate, which can either make or break the investment. The past 10 years have seen constant annual deficits that have brought the public debt to 52% of the GDP. Now this is not catastrophic, but in this case, the trend is not your friend, although the ratio has seem to have hit a plateau. Malaysia’s Debt/GDP (click to enlarge) Moreover, at this point it seems that the growth in GDP can outpace the debt. Historical GDP Growth (click to enlarge) Another risk associated with the investment would be the bursting of the bubble in China which would likely cause a contagion in the region – magnitude of which is unpredictable. Still, I believe that TNB’s fixed revenue streams will provide the necessary shelter, should this scenario come to life. The Valuation The recent quarters and semi-annual results are indicating that the year end EPS for FY 2015 is going to land somewhere around RM 1.5-1.6 (first half of the FY 2015 brought in RM 0.785 in net profits per share), which puts the P/E ratio at 8.5. Remember, that the revenue generated by the Manjung 4 unit, which went live in April, is not reflected in the current results, making the above estimates conservative. Assuming that the 30% revenue increase, that was discussed before, adds to the bottom line net profit with similar margins, the EPS for FY 2017 would be somewhere around RM 2, which translates to a forward P/E of 6.6 with the current stock price of RM 13.2. This puts the forward P/E at the absolute bottom of the historical range as can be seen from the graph below. Notice that for the calculations above, I used the original currency for the sake of simplicity. Dividend and Debt The company also pays a dividend and the official policy is to pay out 40%-60% of annual free cash flow (Cash Flow from Operations – Normalized CapEx). This means that the aggressive growth discussed before would not tamper the dividend as only the maintenance CapEx is accounted in the Free Cash Flow calculation. The growth CapEx is financed by debt. As of now, all of the large growth CapEx projects are already accounted for on the balance sheet. The net debt is currently at RM 21 billion ($5.7 billion), 99.6% of which is with fixed rates, protecting against any potential fluctuations in the interest rate, and for the coming few years, there are not many major payments due, except for the USD denominated loan this year as can be seen from the chart below. This payment is easily covered with the cash on the balance sheet (RM 10 billion). Debt due (click to enlarge) Source: 2014 Annual Report The Takeaway TNB’s business model offers great visibility of future revenues and the coming expansion of total capacity is going to act as a catalyst for revenue growth. This translates into a rare mix of stability and recurring revenues, while allowing for an explosive growth of roughly 30% over the coming 2 years. As discussed before, the forward P/E of 6.6 puts the ratio at an absolute bottom of the historical range, acting as a limit to the downside, providing a risk/reward profile that is greatly skewed to the upside. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.