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ENERGY & OFFSHORE | Staff Reporter, China

Why 2015 was a "year to forget" for Kunlun Energy

Analysts cringe at its earnings.

It has been noted that Kunlun Energy Putting is natural gas vehicles on ice, and price reform was cited as a factor.

According to a research note from Jefferies, when oil prices were over US$100/bbl, Kunlun Energy was going to create a transportation market for natural gas (LNG for trucking and CNG for passenger cars).

Unfortunately, price reform pushed up natural gas prices while OPEC/shale oil crushed oil prices, said the report. The 9-10 month payback period for LNG trucks versus diesel surged to ~43 before settling back to ~16 months as additional consumption taxes and EuroIV standards were implemented.

While the economics may still exist, Jefferies believes the volatility in the past year has dramatically curtailed customer interest.

Here's more from Jefferies:

Ditching upstream. 2015 was a year to forget for Kunlun Energy. Earnings buckled under as oil prices collapsed. The vestigial E&P segment suffered impairments and currency losses from the Kazakh Tenge devaluation. Management has put the upstream segment up for sale. At best, in our view, the segment's valuation is a rounding error. We give it a zero.

Cleaning up Beijing-Tianjin-Hebei. Phase 1 of Line 4 of the Shaanxi-Beijing pipeline should be completed by YE17 (15 bcm capacity). Due to an unfortunate placement of mountain ranges and heavy industries, air in Beijing-Tianjin-Hebei is notoriously polluted. Even more unfortunately, the region contains China's capital and over 100m inhabitants. We believe natural gas, despite its expense, will displace a significant amount of coal in the region.

Now just volumes and margins. Admittedly, Kunlun is a lot less sexy without LNG trucking. However, we believe the de-rating has been too harsh. Distribution margins should recover as oil and gas prices stabilize. Volumes from Line 4 will result in significant growth in 2018. Conservatively, our 2017 based target reflects pipeline capex but not the volumes.

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