20140624-杰富瑞-Natural_Gas_Tour__End_of_the_Week__II__13页_497kb

Summary of Natural Gas Value Chain Tour (II)

Core Content

The document outlines the findings from Jefferies' second annual Natural Gas Value Chain Tour through Beijing, Hebei, Sichuan, and Hong Kong, conducted from June 16-20. The tour included visits to key experts, companies, and infrastructure sites, providing insights into the long-term and near-term prospects of China's natural gas industry, as well as investment opportunities in the sector.

Main Views

Long-Term Prospects of Natural Gas Industry

• Demand Growth: Experts expect natural gas demand to exceed 400bcm by 2020, with some predicting it could reach 480bcm.
• Unconventional Gas: Shale gas is seen as a major growth driver, with potential production reaching 60-100bcm by 2020.
• Price Reform: The implementation of natural gas price reform is anticipated to support domestic production and improve profitability.
• Industrial Shift: There is a growing trend of industrial users switching from coal to natural gas, driven by cost savings and efficiency improvements, despite coal's lower price.

Near-Term Challenges

• LNG Adoption: LNG truck adoption is facing headwinds due to slow growth in heavy duty truck sales and insufficient refueling infrastructure.
• Price Hikes: Expected natural gas price increases in 2014 could impact demand, particularly for LNG trucks.
• Economic Weakness: The broader economic environment and industry consolidation are affecting growth in natural gas vehicles and infrastructure development.

Key Information

Companies Visited

• Sino Oil and Gas (702 HK): Leading CBM developer in the Ordos Basin, with significant growth in CBM production and sales.
• Beijing Jingneng (579 HK): Focused on clean power generation, including gas-fired plants and wind power.
• Suntien Green Energy (956 HK): Regional gas and wind player, with a focus on CNG and LNG stations and wind power utilization.
• ENN Energy (2688 HK): National gas distributor with strong infrastructure and real-time monitoring capabilities.
• Honghua Group (196 HK): Rig manufacturer with a strong backlog and plans for expansion in offshore rig manufacturing.
• China Resources Gas (1193 HK): Optimistic about growth in city gas projects and LPG distribution.
• NewOcean Energy (342 HK): Largest LPG distributor in Guangdong, with a focus on transforming gasoline stations into LPG/LNG stations.
• China Tian Lun Gas (1600 HK): Growing city gas distributor with significant exposure to NGV and potential for new project acquisitions.

Investment Recommendations

• PetroChina (857 HK): Considered the most undervalued and lowest risk investment, with strong upstream cash flow potential and growth in natural gas production.
• SPT Energy Group (1251 HK): Expected to benefit from pressure pumping growth in Xinjiang and a significant increase in revenue and profit.
• CNOOC (883 HK): Recommended as a "Buy" with strong upside potential and growth in natural gas production.
• Service Companies: Seen as beneficiaries of increased capex in gas production, with independent market share growth expected.

Market Dynamics

• LNG Vehicles: A critical long-term growth driver, but currently facing adoption challenges due to economic and infrastructural constraints.
• Coal to Gas Transition: Industrial users are switching from coal to natural gas, which is more cost-effective when considering inefficiencies and maintenance costs.
• Infrastructure Development: The expansion of natural gas pipelines and LNG refueling stations is expected to reduce LNG demand in the long run but will still be important for remote areas and as a buffer.
• Regulatory Environment: Environmental regulations and enforcement are crucial for the sustainable development of shale gas and LNG, with concerns over methane leaks and water pollution.

Conclusion

The tour highlighted the long-term potential of China's natural gas industry, driven by unconventional gas development, price reforms, and industrial demand shifts. However, near-term challenges such as slow LNG truck adoption, insufficient infrastructure, and economic uncertainty remain. The report recommends investing in PetroChina and other service companies, with a focus on the growth of natural gas production and distribution.