Unusual price movement
We believe that MIE's Board is telling the truth. On 02-June 2015, MIE's Boardfiled a statement at the request of the HKSE saying: "the Board confirms that itis not aware of any reasons for these price and volume movements, or of anyinformation which must be announced to avoid a false market in theCompany's securities, or of any inside information that needs to bedisclosed...". We do not believe the fundamentals of the company warrant thecurrent share price and as a result, downgrade MIE to Sell from Hold.
Adjustments to the MIE model
We lowered our gas price estimates for MIE’s SGE project (2016-21e) by 8% toUS$ 8.74/ mcf (average) from $9.50/ mcf. We expect the NDRC to cut CityGate prices 2H15. We immaterially reordered our production schedule for SGE(Figures 7 & 8). We believe MIE will record net losses 2015-17e. We continueto struggle with MIE’s cost of debt trading higher than its cost of equity. Wehave lowered our MIE WACC to 10% from 11% given the rally in MIE’s bonds.
Investment thesis - remains unchanged
Low oil prices hurt this well managed, small cap, E&P company. MIE’sspecialty is Enhanced Oil Recovery (EOR), which is by definition a high costE&P business. DB’s oil price forecasts are unchanged (Figure 9). ChairmanZhang Rulin has always been interested in “building a big E&P company”- wesuspect he is not ready to bail, but rather just starting to build.
Valuation and risks
We value MIE from a DCF model. Our WACC is 10% with a CoE of 11.2% aChina Rfr of 3.9%, an Erp of 5.6% and a Beta of 130. DB standardizes ourChina Rfr (3.9%) and Erp (5.6%). Our cost of debt (COD) is 14%, which is in linewith MIE’s long dated bonds. We use a 3% TG rate to reflect what we believeis MIE’s LT sustainable BOE production growth rate. The principal risks to ourSell include 1) higher than anticipated oil prices; 2) a continued strong rally inMIE’s bonds; and 3) execution risk for the better at the SGE project.
Unusual price movement
We believe that MIE's Board is telling the truth. On 02-June 2015, MIE's Boardfiled a statement at the request of the HKSE saying: "the Board confirms that itis not aware of any reasons for these price and volume movements, or of anyinformation which must be announced to avoid a false market in theCompany's securities, or of any inside information that needs to bedisclosed...". We do not believe the fundamentals of the company warrant thecurrent share price and as a result, downgrade MIE to Sell from Hold.
Adjustments to the MIE model
We lowered our gas price estimates for MIE’s SGE project (2016-21e) by 8% toUS$ 8.74/ mcf (average) from $9.50/ mcf. We expect the NDRC to cut CityGate prices 2H15. We immaterially reordered our production schedule for SGE(Figures 7 & 8). We believe MIE will record net losses 2015-17e. We continueto struggle with MIE’s cost of debt trading higher than its cost of equity. Wehave lowered our MIE WACC to 10% from 11% given the rally in MIE’s bonds.
Investment thesis - remains unchanged
Low oil prices hurt this well managed, small cap, E&P company. MIE’sspecialty is Enhanced Oil Recovery (EOR), which is by definition a high costE&P business. DB’s oil price forecasts are unchanged (Figure 9). ChairmanZhang Rulin has always been interested in “building a big E&P company”- wesuspect he is not ready to bail, but rather just starting to build.
Valuation and risks
We value MIE from a DCF model. Our WACC is 10% with a CoE of 11.2% aChina Rfr of 3.9%, an Erp of 5.6% and a Beta of 130. DB standardizes ourChina Rfr (3.9%) and Erp (5.6%). Our cost of debt (COD) is 14%, which is in linewith MIE’s long dated bonds. We use a 3% TG rate to reflect what we believeis MIE’s LT sustainable BOE production growth rate. The principal risks to ourSell include 1) higher than anticipated oil prices; 2) a continued strong rally inMIE’s bonds; and 3) execution risk for the better at the SGE project.
