SUNSHINE_OILSANDS(2012.HK)INITIATE_OW(V)：ABUNDANT_RESOURCES_DEEP_VALUE_[CORRECTION]-2012-12-14.ppt

,4.50,3.03,48.5,regulations,1,101,8,535,100,789,Company report,Nat Resources&EnergyOil&GasEquity Hong Kong,abcGlobal Research,Sunshine Oilsands(2012 HK),Overweight(V)Targetprice(HKD)Share price(HKD)Potential return(%)Note:Potential return equals the percentagedifference between the current share price andthe target priceDec 2011 a 2012 e 2013 e,Initiate 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 it has booked more reserves,started,HSBC 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-rating,Note:(V)=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*AnalystThe 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&DisclosuresThis report must be readwith the disclosures andthe analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of it,Not perfect:We acknowledge that Sunshines oil sands assets have higher developmentcosts and lower returns compared to conventional oil assets.As 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 reserves 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 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 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 comparable 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 approvals 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 sands 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:HSBC,Source:HSBC,0,Sunshine Oilsands(2012 HK)Oil&Gas9 November 2012Financials&valuationFinancial statements,Key forecast drivers,abc,Year to,12/2011a,12/2012e,12/2013e,12/2014e,Year to,12/2011a,12/2012e,12/2013e,12/2014e,Profit&loss summary(CADm),Bitumen blend value(CAD/bbl),69,70,Revenue,0,0,84,186,Dry bitumen value(CAD/bbl),0,57,57,EBITDADepreciation&amortisation,-450,-300,26-123,71-203,Operating profit/EBITNet interest,-45-24,-303,-971,-1321,Valuation data,PBTHSBC PBTTaxationNet profitHSBC net profit,-69-691-67-67,-27-270-27-27,-95-950-95-95,-131-1310-131-131,Year toEV/salesEV/EBITDAEV/IC,12/2011a-15.9,12/2012e-1.3,12/2013e14.045.41.3,12/2014e8.422.11.4,Cash flow summary(CADm),PE*P/Book value,NM6.1,NM1.2,NM1.3,NM1.6,Cash flow from operationsCapex,-14-156,-16-332,27-419,85-467,FCF yield(%)Dividend yield(%),-13.20.0,-36.30.0,-35.70.0,-34.90.0,Cash flow from investmentDividendsChange in net debtFCF equity,-1540-43-145,-3320-222-397,-4190392-392,-4670382-382,Note:*=Based on HSBC EPS(fully diluted)Price relative,Balance sheet summary(CADm),6.5,6.5,Intangible fixed assetsTangible fixed assetsCurrent assetsCash&othersTotal assetsOperating liabilitiesGross debtNet debt,038689854763270-85,0667311307978620-307,09631191151,0826220085,01,2281371331,36575600467,65.554.543.532.52,65.554.543.532.52,Shareholders funds,149,916,821,690,2010,2011,2012,2013,Invested capital,64,609,905,1,156,SUNSHINE OILSANDS LTD,Rel to HANG SENG INDEX,Source:HSBCRatio,growth and per share analysis,Year to,12/2011a,12/2012e,12/2013e,12/2014e,Note:price at close of 08 Nov 2012,Y-o-y%change,RevenueEBITDAOperating 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 debt,0.0-36.0-36.3-11.80.00.0-57.21.9-,0.0-8.9-5.0-3.70.00.09.7-33.510.3-,0.1-12.8-11.0-9.330.9-114.7-10.33.332.1,0.2-12.9-17.4-10.738.0-71.3-67.76.618.2,Per 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,-0.05-0.050.000.24,2,4,4,39,6,12,14,10,40,26,45,49,Sunshine Oilsands(2012 HK)Oil&Gas9 November 2012ContentsDeep value resource playInvestment summaryAbundant resourcesResources to production conversion on trackNear-term financing needs to fulfilled by debtFive things to watch,abcAppendix 4:Recent oil sandsdeals compsAppendix 5:Sunshines coststructure,Valuation and risksValuationInvestment risksCatalystsAppendixAppendix 1:Oilsands industryoverviewAppendix 2:Reserve bookingpractices,151522232534,Appendix 6:Canadasenvironmental regulationsAppendix 7:ManagementprofilesAppendix 8:Commonterminology of the oilsandsindustryDisclosure appendixDisclaimer,434451,Appendix 3:Shareholder,structure,38,3,Sunshine 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 of an early-stage oil sandsdeveloper,but we believe the valuation is attractive after therecent sell-off,abc,Investment 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 resources.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 production 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 theexpiry of the six-month IPO lock-up,we believe4,Sunshines 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 capability 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 and 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 2013,Sunshine Oilsands(2012 HK)Oil&Gas9 November 2012 JV with Sinopec to accelerate reservedevelopmentMore 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 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 party,Secondly,we value Sunshines assets from fourperspectives and argue that its valuation is veryundemanding 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 oil sands companywith assets that are difficult to value.,abc,evaluators,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 resourcesto production The company is making good progress insecuring funding5,Resources*-Bnbbl,Recoverable,Acres*,5,4,3,Sunshine 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 reserves 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 account 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 is,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 reserves.However,thedeveloping and operating costs have come downsubstantially,thanks to technological advances.Sunshines track record of building scale6,Sunshine has vast resources and hasalready started booking reservesAs at 30 June 2012,Sunshine had investedUSD532.1m in oil sands leases,drillingoperations,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 purchaseafter 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 estimate contingent resourceshave grown from 1.3bn boe in 2009 to 5.0bnboe in 2012,growing at a CAGR of 40%.2,000,000,abc,1,000,640,1,000,640,1,085,747,1,156,377,1,189,7625.0,1,800,0001,600,0001,400,0001,200,0001,000,000,2,3.1,800,000600,000,10,107,840,1.3,1.3,2.2,400,000200,0000,2007,2008,2009,2010,2011,2012,2P Reserv es-LHS,Best Estimate Contingent-LHS,Land 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 data6,Sunshine Oilsands(2012 HK)Oil&Gas,abc,9 November 2012Sunshines resource mapSource:Company data7,Sunshine Oilsands(2012 HK)Oil 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 terms 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 provides 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 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 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.,abc,Sunshines Resource Assessments by GLJ and D&M in November 2011 vs.May 2012,Types of resources,_ Reserves(MMbbls)_,ContingentResources,_ Pre Tax PV10%(CADm)_,(MMbbls),1P,2P,3P,Best Estimate,1P,2P,3P Best Estimate,ClasticsCarbonatesConventional Heavy OilTotal-Nov 31,2011 assessmentClasticsCarbonatesConventional Heavy OilTotal-May 31,2012 assessmentClasticsCarbonatesConventional Heavy OilTotal-additions,0022780280780078,4130641944005445270(1)26,5520956159706603450(3)42,2,45061603,0663,6101,34504,9551,16072901,889,003838308043123080(34)274,7900568469040149181140(42)72,1,3760611,4371,5320231,5551560(38)118,4,36369905,0625,1411,73906,8807781,04001,818,Source:GLJ,Sunshine,HSBC8,-,-,-,-,Sunshine Oilsands(2012 HK)Oil&Gas9 November 2012Three different resource types and Sunshines plan,abc,Resource typeClastics,DescriptionOil-saturated sands,which contain bitumen extractedthrough thermal production(usually SAGD),Commercial profileCommercially viable,Sunshines progressIn active develop