Oil price uncertainty could drag Kunlun Energy's E&P business

Aging old fields will have effects too.

For 2014F, the management of Kunlun Energy targets to maintain the oil production volume at 16-17mn bbl.

According to a research note from Nomura, however, it remains cautious on Kunlun Energy's E&P business, with earnings likely to be on a downward trend, given several factors.

The report said that the factors are the following: Oil price uncertainty; increasing unit production cost as its oil fields are getting older; and the Kazakhstan project, as the project is subject to currency devaluation of the Kazakhstan

tenge (by approximately 19% against the USD), which is likely to reduce the dividend income from the project (denominated in tenge).

Here's more from Nomura:

We see the recent share price rally mainly coming from the investors’ expectation on Kunlun Gas injection to Kunlun Energy.

While we concede that the asset injection may occur in the future, it seems unlikely in the near term, given:

1) We notice that there is no definitive time line for the asset injection due to the ongoing corruption probes;

2) Kunlun Energy just appointed a new chairman on 12 June; we think new management will be very cautious in approving any parent’s asset injection; and

3) If there is any parent asset injection that might occur with Kunlun Energy, we believe it is more likely to be an injection of the LNG terminal in Caofeidian, rather than Kunlun Gas, given the asset size is smaller. However, in our opinion, the return of the LNG terminal is not particularly attractive, with IRR of only 10%.

We believe the only positive business of the company is its gas transmission business, as we expect transmission volume growth to be at 15% y-y, in line with management’s target of 13-15% y-y.

In addition, the company can also enjoy operating leverage amid the transmission volume growth.