SUNSHINEOILSANDS.HKINITIATEOWVABUNDANTRESOURCESDEEPVALUECORRECTION1214

1、4.503.0348.5regulations1,1018,535100789company reportnat resources & energyoil & gasequity hong kongabcglobal researchsunshine oilsands (2012 hk)overweight (v)targetprice (hkd)share price (hkd)potential return (%)note: potential return equals the percentagedifference between the current shar

2、e price andthe target pricedec 2011 a 2012 e 2013 einitiate ow(v): abundant resources, deep value correction investing in an early-stage oil sands company with difficult-to-value assets is not for the faint-hearted we believe sunshine offers deep value after its share price fell40%, especially given

3、 it has booked more reserves, startedhsbc epshsbc peperformanceabsolute (%)relative (%)-0.051m-0.3-6.1-0.013m-32.7-38.9-0.0312m-proving its execution capability and secured more credit initiate with an overweight (v) and a target price of hkd4.5;multiple catalysts could drive the re-ratingnote: (v)

4、= volatile (please see disclosure appendix)9 november 2012kevin lian*analystthe hongkong and shanghai bankingcorporation limited+852 2822 .hkthomas c hilboldt*head of oil, gas & petrochemicalresearch, asia-pacificthe hongkong and shanghai bankingcorporation limited+852 2822 .hktingting si*analys

5、tthe hongkong and shanghai bankingcorporation limited+852 2996 .hkview hsbc global research at:http:/*employed by a non-us affiliate ofhsbc securities (usa) inc, and is notregistered/qualified pursuant to finraissuer of report: the hongkong andshanghai bankingcorporation limiteddisclaimer &discl

6、osuresthis report must be readwith the disclosures andthe analyst certifications inthe disclosure appendix,and with the disclaimer,which forms part of itnot perfect: we acknowledge that sunshines oil sands assets have higher developmentcosts and lower returns compared to conventional oil assets. as

7、an early-stage oil sandsdeveloper, it is particularly vulnerable to low oil prices, project delays and lack of funding.for investors, there is the added complication of low, albeit improving share liquidity.but still much to like: however, we highlight that sunshine has managed to book 6%more 2p res

8、erves and 62% more best estimate contingent resources, executed existingprojects on schedule and on budget, and secured an additional cad200m credit line sevenmonths after its ipo. we believe sunshine is on track to deliver its first 5,000 barrels perday (bpd) in 4q13, rising to an estimated 200,000

9、 bpd by 2024.risks mitigated: the stock dropped c40% in the past six weeks since the expiry of thesix-month ipo lock-up, despite an improving fundamental picture. we believe the recentsell-off has mitigated a significant amount of the risk involved in investing in sunshine.initiate with an ow(v) and

10、 target price of hkd4.5: our target price is sum-of-the-parts(sotp)-based using a dcf approach for 2p and best estimate contingent resources, andmultiples for conventional heavy oil reserves. we cross-checked our target price againstvaluations from third party evaluators, comparable peers and compar

11、able transactions.consensus: our target price is 31% below the consensus target price of hkd5.7,reflecting our more cautious oil price and operating assumptions.key catalysts: more reserve bookings after the winter drilling programme; operation updateon existing capacity build-out; regulatory approv

12、als of planned projects; jv with sinopec toaccelerate reserve development; more credit funding; secondary listings in canada (receivedconditional approval on 8 november 2012).key downside risks: delay of first production; lower-than-expected wti crude oil price;cost overruns while developing oil san

13、ds assets; low share trading liquidity.this report replaces the one of the same title and date to correct the companysindexing information.index hang seng index enterprise value (cadm)index level 22,100 free float (%)ric 2012.hk market cap (usdm)bloomberg 2012 hk market cap (hkdm)source: hsbcsource:

14、 hsbc0sunshine oilsands (2012 hk)oil & gas9 november 2012financials & valuationfinancial statementskey forecast driversabcyear to12/2011a12/2012e12/2013e12/2014eyear to12/2011a 12/2012e12/2013e12/2014eprofit & loss summary (cadm)bitumen blend value (cad/bbl)6970revenue0084186dry bitumen

15、value (cad/bbl)05757ebitdadepreciation & amortisation-450-30026-12371-203operating profit/ebitnet interest-45-24-303-971-1321valuation datapbthsbc pbttaxationnet profithsbc net profit-69-691-67-67-27-270-27-27-95-950-95-95-131-1310-131-131year toev/salesev/ebitdaev/ic12/2011a-15.912/2012e-1.312/

16、2013e14.045.41.312/2014e8.422.11.4cash flow summary (cadm)pe*p/book valuenm6.1nm1.2nm1.3nm1.6cash flow from operationscapex-14-156-16-33227-41985-467fcf yield (%)dividend yield (%)-13.20.0-36.30.0-35.70.0-34.90.0cash flow from investmentdividendschange in net debtfcf equity-1540-43-145-3320-222-397-

17、4190392-392-4670382-382note: * = based on hsbc eps (fully diluted)price relativebalance sheet summary (cadm)6.56.5intangible fixed assetstangible fixed assetscurrent assetscash & otherstotal assetsoperating liabilitiesgross debtnet debt038689854763270-850667311307978620-30709631191151,0826220085

18、01,2281371331,3657560046765.554.543.532.5265.554.543.532.52shareholders funds1499168216902010201120122013invested capital646099051,156sunshine oilsands ltdrel to hang seng indexsource: hsbcratio, growth and per share analysisyear to12/2011a12/2012e12/2013e12/2014enote: price at close of 08 nov 2012y

19、-o-y % changerevenueebitdaoperating profitpbthsbc eps-120.6171.4-ratios (%)revenue/ic (x)roicroeroaebitda marginoperating profit marginebitda/net interest (x)net debt/equitynet debt/ebitda (x)cf from operations/net debt0.0-36.0-36.3-11.80.00.0-57.21.9-0.0-8.9-5.0-3.70.00.09.7-33.510.3-0.1-12.8-11.0-

20、9.330.9-114.7-10.33.332.10.2-12.9-17.4-10.738.0-71.3-67.76.618.2per share data (cad)eps reported (fully diluted)hsbc eps (fully diluted)dpsbook value-0.03-0.050.000.06-0.01-0.010.000.33-0.03-0.030.000.29-0.05-0.050.000.2424439612141040264549sunshine oilsands (2012 hk)oil & gas9 november 2012cont

21、entsdeep value resource playinvestment summaryabundant resourcesresources to production conversion on tracknear-term financing needs to fulfilled by debtfive things to watchabcappendix 4: recent oil sandsdeals compsappendix 5: sunshines coststructurevaluation and risksvaluationinvestment riskscataly

22、stsappendixappendix 1: oilsands industryoverviewappendix 2: reserve bookingpractices151522232534appendix 6: canadasenvironmental regulationsappendix 7: managementprofilesappendix 8: commonterminology of the oilsandsindustrydisclosure appendixdisclaimer434451appendix 3: shareholderstructure383sunshin

23、e oilsands (2012 hk)oil & gas9 november 2012deep value resource play sunshine has abundant oil sands assets that have becomeincreasingly important to the worlds oil supply sunshines reserve booking and production capacity build-out areon schedule and on budget high risks remain, given the nature

24、 of an early-stage oil sandsdeveloper, but we believe the valuation is attractive after therecent sell-offabcinvestment summarysunshine is one of the largest holders of oil sandsleases in the athabasca region, one of the threemajor regions in alberta that holds the majorityof canadian oil sands reso

25、urces. the companywas listed on the hong kong stock exchange inmarch 2012.we acknowledge there are a variety of concernsinvolved in investing in sunshine. these include: oil sands assets generally have higherdevelopment costs and lower investmentreturns than conventional oil assets sunshines first p

26、roduction is at least oneyear away sunshines vast amount of assets are difficultto value and are sensitive to a number ofassumptions sunshine is the only oil sands developer listedin hong kong and the stocks liquidity is stilllow, albeit improvinghowever, after the stock fell about 40% after theexpi

27、ry of the six-month ipo lock-up, we believe4sunshines valuation is attractive, especially givenits fundamentals have become more promisingseven months after its ipo: sunshine has booked 6% more 2p reserves and62% more best estimate contingent resources the company has started to prove itsexecution c

28、apability and is on budget and onschedule to begin production in 4q13 the company has secured cad200m morecredit, which is critical in the capital-intensiveoil sands businessat the same time, we think there are abundantcatalysts in sight to potentially reshape themarkets perception of the company an

29、d re-ratethe stock including: more reserve booking in a few months timeafter the winter drilling programme operation update on existing capacity build-out regulatory approvals for planned projectsin 2013sunshine oilsands (2012 hk)oil & gas9 november 2012 jv with sinopec to accelerate reservedeve

30、lopmentmore credit funding agreements secondary listing in canada (receivedconditional approval on 8 november 2012)with all these factors in mind, we initiate coverageof sunshine with an overweight (v) rating and atarget price of hkd4.5. our target price is basedon a sum-of-the-parts (sotp) approach

31、 using adcf method to value the 2p and best estimatecontingent resources, and multiples to valueconventional heavy oil assets. we cross-checkedour target price against valuations from third partysecondly, we value sunshines assets from fourperspectives and argue that its valuation is veryundemanding

32、 now: hsbcs sum-of-the-parts (sotp) valuation competent person, or third party evaluatorsdcf valuation comparable companies trading range transaction multiples of recent dealslastly, we address key investment risks andcatalysts to better understand the complex natureof investing in an early-stage oi

33、l sands companywith assets that are difficult to value.abcevaluators, peers and comparable transactions.the report is arranged in the following order:firstly, we explain in detail what we like aboutsunshine, namely: the company has abundant oil sandsresources the company is on track to convert resou

34、rcesto production the company is making good progress insecuring funding5resources*-bnbblrecoverableacres*543sunshine oilsands (2012 hk)oil & gas9 november 2012abundant resourcescanada has significant oil sands assetscanada has 175.2bn barrels of proved oil reserves,or 10.6% of the total oil res

35、erves in the world, as of2011, according to bp. about 97% of canadasreserves are in the form of oil sands. productionfrom oil sands accounted for 1.6% of global oilproduction in 2009 and is expected to rise to 4.6%in 2035, according to iea, implying a 4.6% cagr.more importantly, canadas oil sands ac

36、count for52% of so-called “investible and accessible” oilreserves, which are only 22% of global oil reserves,according to estimates by the canadian associationof petroleum producers (capp). the remaining78% of oil reserves is “state owned” andconsidered difficult for global capital to invest in.it i

37、s, therefore, logical that the entire world hasinvested billions of dollars over the last few yearsto gain access to canadas oil sands assets. itsevident that oil sand reserve development andproduction remains relatively expensive versusconventional oil reserves and many other types ofunconventional

38、 reserves. however, thedeveloping and operating costs have come downsubstantially, thanks to technological advances.sunshines track record of building scale6sunshine has vast resources and hasalready started booking reservesas at 30 june 2012, sunshine had investedusd532.1m in oil sands leases, dril

39、lingoperations, project planning and regulatoryapplication processing.sunshine managed to purchase 1.2m acres of oilsands lease or c7% of granted leases in theathabasca oil sands region. it is important to notethat only a small portion of the acreage in theathabasca region is still available for pur

40、chaseafter multiple years of land grabbing activities.as a result, we believe sunshine is wellpositioned in the oil sands industry withsubstantial holdings of resources.over the years, sunshine has managed to booksignificant resources and reserves through activedrilling activities: sunshines best es

41、timate contingent resourceshave grown from 1.3bn boe in 2009 to 5.0bnboe in 2012, growing at a cagr of 40%.2,000,000abc1,000,6401,000,6401, 085, 7471, 156, 3771,189,7625.01,800,0001,600,0001,400,0001,200,0001,000,00023.1800,000600,00010107,840400,000200,00002007200820092010201120122p reserv

42、 es - lhsbest estimate contingent - lhsland position - rhs*recoverable resource defined as 2p + best estimate contingent resources*hectare = 2.47105381 acres; sunshine currently holds 467,969 hectares of leases (including all oils sands leases and png licenses)source: company data6sunshine oilsands

43、(2012 hk)oil & gasabc9 november 2012sunshines resource mapsource: company data7sunshine oilsands (2012 hk)oil & gas9 november 2012 sunshine booked 2p reserves of 445 mmbblsat west ells, thickwood, legend lake andmuskwa in 2012 following the evaluation bythird party consulting firm glj petrol

44、eumconsultants (glj). sunshine booked 1p reserves of 80 mmbblssix months after it received regulatoryapproval from the ercb (energy resourcesconservation board) for its first 10,000 bpdclastic sagd (steam assisted gravitydrainage) project at its west ells property on26 january 2012.sunshine typicall

45、y conducts drilling only inwinter when field access is naturally available,and will build infrastructure for development andproduction once potential resources are identifiedfor all-year-long uninterrupted operations.there are many hurdles a company needs to clearbefore a barrel of petroleum can be

46、booked asproved reserve (1p). wells need to be drilled;regulatory approvals need to be received,among others. in appendix 2, we provide adetailed study of: milestone events that need to happen to clearthese reserve booking hurdles an illustration of this process with four realcases of sunshine key t

47、erms of resources and reserves essentialto understand this processwe note the company has demonstrated asmooth resource booking process so far, thanksto managements solid experience andexecution capability.sunshine provided its latest resource and reserveupdate on 5 july 2012. the table below provid

48、es asummary of the two reports from competentpersons or professional reserve evaluators onsunshines resources and valuation. we can seethat sunshine is on track to create value throughorganic drilling activities by booking 6% more 2preserves and 62% more best estimate contingentresources in just six

49、 months.resource types matterthe majority of sunshines reserves and bestestimate contingent resource are clastics. the rest arecarbonates and conventional heavy oil. the table onthe next page summarises how these three types ofresources differ and sunshines positioning.sunshines focus is on clastics

50、 resources, whichare a proven type of resource that is suitable forcommercial-scale recovery with currenttechnology. conventional resources are relativelysmall, but should provide some cash flows forsunshine in the near future.abcsunshines resource assessments by glj and d&m in november 2011 vs.

51、 may 2012types of resources_ reserves (mmbbls) _contingentresources_ pre tax pv10% (cadm) _(mmbbls)1p2p3pbest estimate1p2p3p best estimateclasticscarbonatesconventional heavy oiltotal - nov 31, 2011 assessmentclasticscarbonatesconventional heavy oiltotal - may 31, 2012 assessmentclasticscarbonatesco

52、nventional heavy oiltotal - additions00227802807800784130641944005445270(1)265520956159706603450(3)422,45061603,0663,6101,34504,9551,16072901,889003838308043123080(34)2747900568469040149181140(42)721,3760611,4371,5320231,5551560(38)1184,36369905,0625,1411,73906,8807781,04001,818source: glj, sunshine

53、, hsbc8-sunshine oilsands (2012 hk)oil & gas9 november 2012three different resource types and sunshines planabcresource typeclasticsdescriptionoil-saturated sands, which contain bitumen extractedthrough thermal production (usually sagd)commercial profilecommercially viablesunshines progressin ac

54、tive developmentstage; initial productionexpected in 3q13 at westellscarbonatesoil-saturated carbonate-based sedimentary rock with thepotential to be commercially produced with thermalextraction techniques and developing technologiesneed further technologybreakthrough to becommercially viableplannin

55、g pilot projects toexplore potentialconventional heavy oil conventional oils that are heavycommercially viablemuskwa in pre-productionstagesource: company data, hsbcfor carbonates resources, there are no knownsuccessful commercial projects that use sagd orcss (cyclic steam stimulation) to recoverbit

56、umen from carbonate formations. the industryand sunshine are conducting pilot programmes toexplore the carbonate resources commercialpotential. sunshine actually booked 1.3bn barrelsof best estimate contingent resources in maysunshines resources base detail breakdown (as of july 2012)2012, which is

57、an encouraging step towardseventual reserve booking and commercialproduction.propertyclasticstotal piip_reserves - mmbbl _ contingent resources - mmbbl _ pre tax pv 10% - cadm _1p 2p 3p low best high 1p 2p 3p low best highestimates estimates estimatesestimates estimates estimateswest eiisthickwoodle

58、gend lakepelican lakeopportunityeast long lakecrow lakeportageharpermuskwa/godintotal clastic3,9631,4031,5051,5612,9051783322,4938,7111,62424,67578-78141162137-440200236161-597300193241772-16-7-811,61065534246190816730-467512513,6109784986921,0863827420991,6714735,974308-308474202228-904751467314-1,

59、532817196215683-44-952,0501774554627857149122-9071285,11827021089177690949726226-364726811,176carbonatesharperells leducportagegoffermuskwasaleskisouth thickwoodtotal carbonates10,5569216,0704,77722,92559628746,130-300-300371158421215180-1,3451356336135810181183125575,432-416-416140372905202120-1,73

60、926261082213095811052937,933conventional heavyoilmuskwatotal conventional70704.966-4414142323-heavy oilcombined total70,876804456031,9104,95511,4063129181,5552,4666,85719,109based on sunshines competent persons reports dated 31 may 2012.pre-tax pv 10% incorporate gljs april 2012 commodity price forecasts and d & ms april 2012 commodity price forecastsource: