Share Name Share Symbol Market Type Share ISIN Share Description
Portland Gas LSE:PTG London Ordinary Share GB00B28YMP66
  Price Change % Change Share Price Bid Price Offer Price High Price Low Price Open Price Shares Traded Last Trade
  +0.00p +0.00% 90.00p 0.00p 0.00p - - - 0 06:37:39
Industry Sector Turnover (m) Profit (m) EPS - Basic PE Ratio Market Cap (m)
Oil Equipment Services & Distribution 0.0 -1.3 -1.8 - 66.42

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Date Time Title Posts
02/9/201007:45Portland Gas1,180
14/1/201016:30M & A strong in 2009 this must be the year for PTG.... ????2
08/4/200923:10Planestation Group12,152
27/12/200816:36Fairlop Waters Planning Applications103

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eacn: bones30, Yes I saw that. I was able to roughly replicate the figures assuming: a cushion gas price of 35p/therm, opex inflation of 3%, gas storage price inflation of 3%, a 50:50 split of debt to equity and a capex spread of £170M in 2010 & 2011, £227M in 2012 to 2014 and £113M in 2015. My NPVs and IRRs were very similar to those produced by EO for a range of storage prices (15p/therm to 20p/therm) and average cycles (1 to 1.25 p.a.), assuming a 35 year period for calculating NPVs. Projected IRRs for Esmond are below those touted for Portland (projected IRRs of between 19% and 25%) mainly because Portland is assumed to command a total storage price of between 30p and 40p/therm, of which c. 20p is intrinsic value (as per the Esmond calculation), and the rest is extrinsic, short cycle revenue, which only the upper Esmond reservoir could hope to generate, and even then at a much lower premium. I note that I was able to match the Portland NPVs with only a 22 year period (significantly less than with Esmond). If Portland can't find funding at higher projected IRRs , then I would be surprised if Esmond will find it easy to attract finance, particularly since Esmond is projected to require £1,133M of finance, compared to £450M for Portland, and Esmond, being offshore and with acquifer issues, has a higher probability and cost of over-run. It is important to point out that the Esmond IRRs are those available to an equity investor assuming a 50:50 debt to equity split, with cushion gas costs (c. £475M) covered by additional debt facilities, and total ownership of the project. That implies that total debt peaks at £975M (assuming a 10 year rolling facility at 8%) with equity at £567M, giving an overall ratio of 65:35 debt to equity at peak. The IRR and NPV are sensitive to the cushion gas costs and if there were to be a gas price spike to 70p in 2015 then this would dent returns. Given the risks associated with Esmond development, it is unlikely that an investor would be prepared to cede more than a few % of the project to EO if the investor is providing all of the finance. So while the headline NPV may be over £1B, EO's share of that will at best be a % or two. Of course that could make a big difference to the EO share price, but I wouldn't bank on it in the near term: there are more attractive projects available.
mina123golf2: bones30 Wise words from eacn. This share price has been up and down in the range 40p to 70p for months now and this certainly looks like a sustained move upwards with doubtless a few hiccups along the way. It is almost exactly a year to the day since planning permission was given by DCC (16th May 2008 ??)- at that time the share price went to around 430p - the disasterous fall is well documented since then.I really believe that buying strongly now is the order of the day. As a matter of interest did eacn advice come to late - did you sell???
eacn: Chrismez, The fall in PTG's share price has been on modest volume. The share price does not therefore necessarily reflect the price at which the company can be acquired. To gain control of PTG, a predator would need to acquire at least 50% of the shares, and for a full takeover at least 75% of the shares (this is the level at which you can force through a scheme of arrangement, which allows the predator to buy out the remaining holders - historically the rule of thumb was 90%, the level at which the predator can enforce the "mop up" of minority holdings under the Companies Act). With the management holding c. 23% and Credit Suisse 25%, it is highly unlikely that a predator can gain control of PTG if this is opposed by both management and Credit Suisse. A predator can only force through a takeover with the agreement of Credit Suisse. We know that in July Credit Suisse acquired £9M of PTG shares at a price of 355p. We also know that management recently took shares in lieu of bonuses at 409p a share. We can therefore conclude that both parties believed PTG to be worth a great deal more than the current share price only a few months ago. Is it possible that these shareholders are now prepared to sell the company for 100p a share? I doubt it. While it is currently the vogue to assume that bank funding is impossible to obtain, in the real economy lending continues. Within the last 4 weeks, an SME of which I am a director, raised an 8 digit sum from UK banks at a few percent above LIBOR on an unsecured basis. Note the word unsecured. With LIBOR falling and the UK yield curve now restored to a healthy incline, and likely to improve further with base rate set to fall to 2% in 2009, it is reasonable to suppose that lending will come back in Q1 and Q2 2009, albeit on the sort of conservative basis that was seen in the late 1980's and early 1990's. PTG should therefore be able to raise some funds through debt markets in 2009. But perhaps more importantly a predator should also be able to raise funds via debt in H1 2009, probably on the basis of a £ of debt for a £ of equity. That should ease the rate of return expectations since debt will come more cheaply than equity capital. Management are therefore correct to call a timeout on negotiations at this stage, in the hope that improvements in the debt markets will lead to better farm-in / sale terms in 2009. That in itself does not ensure that PTG will get more than 100p per share for Portland in 2009. However, 100p a share for Portland, which is roughly equivalent to PTG agreeing to cede circa 85% of the revenue share to a JV partner in return for covering the development cost, implies that Portland is worth less than Caythorpe. Caythorpe involved £100M of CAPEX for 7.5bcf of storage and a cycle time roughly equivalent to Portland. Portland offers roughly 5 times as much storage at 5 times the CAPEX (i.e. the same CAPEX cost per therm/SBU) for the same cycle time (i.e. the same intrinsic and extrinsic value per therm/SBU). That strongly suggests that Portland should be worth 5 times Caythorpe since storage prices for the two facilities should be closely matched. Now, Caythorpe negotiations were probably a few months ahead of those for Portland, and may not, therefore, have fully factored in the sea change in the debt markets that occurred in October. However, even taking that into account, I remain of the view that Portland remains worth a multiple of the price achieved for Caythorpe. I do, however, remain nervous that management doesn't have the foresight or skill set needed to realise that value. While they currently have the cash to survive, I am concerned that they are proposing to spend some of that cash on continued development before securing full funding. I can see no logic in such an approach. Portland is not a wasting asset, and while there may be some marginal reduction in the project's NPV as a result of delays ( since in the longer term gas storage prices are likely to fall), at present any concern on that front is outweighed by the need to conserve cash. I am also very nervous that piecemeal fund raising of £12M in Q1 2009 will be unnecessarily dilutive. P.S. Can anyone download the report and accounts? According to my system the PDF is corrupt. I don't get a printed copy since my shares are in nominee.
eacn: holism, Re: Credit Suisse, you may be right, but there is a big difference between the E&G project and the Portland project: the former is probably now marginal, whereas the latter remains very economic. With PTG Credit Suisse can generate a decent return if they play their hand to the full. I was once on the board of a quoted company of a similar size to PTG, that got into a mess as a result of a series of poor management decisions. The share price collapsed, even though the core businness had value. The institutional holders made it clear to the Chairman that changes were required, and in short order the bulk of the executive team were ousted. For my sins I ended up running the company. The institutions made it clear that they wanted an exit in short order, which fortunately was also my agenda, since I only came to be on the board as a result of a takeover. Within a year the company was sold at a decent price which reflected its core value. I can imagine a similar story here. I am sure that Credit Suisse understands the gas storage market and would be very surprised if they were to sell down PTG at these prices. Clearsoup, I think you'll find that Credit Suisse have in fact lowered their stake in Egdon from 12.903,924 on 13.02.2008 to 11,903,924 on 05.11.2008. Until a buyer can be found for their shares the EDR share price is likely to remain under pressure.
eacn: Clearsoup, Re: post 761, thanks for the sentiment. My investment in PTG makes up less than 5% of my active trading portfolio and less than 2% of my assets so PTG's fall while painful is not terminal. Taking into account share sales made at the time that planning permission was granted, I am currently just under 40% down on my PTG investment, with a break even at around 210p. I remain of the view that if the board of PTG saw the light and abandoned the "independent gas storage" business model, they could yet realize at least 200p for Portland, possibly more. My overall reaction to yesterday's RNS was in fact relief. Any sort of JV, particularly one with multiple partners, was never an attractive option for shareholders. As I said in a post a few weeks ago, the PTG board needed to take a timeout on the process and reconsider the options, which is what I hope they will now do. By opting for the JV route PTG was consigning its share price to the doldrums for years to come. An independent gas storage business, as opposed to a business that finds and develops gas storage projects for sale, should rightly be valued on a multiple of earnings not on the value of its assets. As such a JV would not generate value for shareholders for years to come, whereas an outright sale should generate value in the next year or two. My thinking has always been that short term cash in the hand is generally preferable to future value based upon projected cashflows in years to come. When meaningful projected cashflows are as far away as 2015, I would favour short term cash unless the discount rate for future cashflows is greater than 20%. So, for example, if PTG was to generate post tax revenues of say £30M in 2015 from a 30% share in Portland, then on a PE of 8 PTG would be worth £240M in 2015 or roughly £3 a share assuming 80 million shares in issue (i.e. assuming limited further dilution). If today's share price was, say, 80p then that implies that the projected future fair value of £3 is being discounted at a rate of 20% p.a. (i.e. £3 in 2015 is equivalent to 80p in today's money if you use a discount rate of 20%). On that basis I would on balance prefer to hold on for £3 in 2015 rather than sell Portland for the equivalent of 80p. However, that comparison ignores the option of selling Portland for cash in the short term. Today's share price reflects the fact that the company continues to issue RNS's which reject that option. The insistence on keeping a 50% share in the asset is what is killing both the negotiations and the SP, because the potential JV partners aren't prepared to stump up for all the development costs on that basis and PTG is not in a position to raise cash to make up the difference. PTG need to face facts. The company is not going to raise the £100 million or so of finance it needs to retain a 50% stake in 2009 without massive dilution of shareholders. That will not generate long term value for existing shareholders, and may well be opposed by Credit Suisse. Sooner or later the board is going to realize that a sale is the only option, and at that point the share price should rerate to reflect the potential for short term gain. 80p a share implies that Portland is worth £64 million, which is less than the £75 million price paid for Caythorpe only a few weeks ago, a much smaller facility with an equivalent cycle time to Portland. I find it difficult to believe that Portland could not be sold for at least £150 million today, even in these difficult markets, which is equivalent to 190p a share. I note that Daniel Stewart was only recently suggesting a price of 250p a share or c. £200 million for Portland, based on a trade sale. If, however, the board persist in pursuing the "independent gas storage" model, and try to retain a 50% share in Portland, the share price will decline further and there is a good chance that shareholders will baulk at any dilutive fundraising. Institutional shareholders are rarely investors for the long term (i.e. for 5 or more years) and Credit Suisse's record suggests that they, quite reasonably, have shorter investment horizons. I would not be in the least surprised to find out that they have just sold down their stake in Encore, and I would not be surprised if they baulked at a plan for PTG which involved significant dilution. My major mistake has been in failing to take the company at its word: I assumed that they would sell Portland if the opportunity was there, whereas they have consistently said that they wanted to be an independent gas storage business. These two different approaches make a world of difference to the share price.
eacn: holism, Asset auctions often develop an internal logic of their own, which has little or no connection to the gyrations in the public markets. It may well be that the bidders for Portland (and the RNS clearly suggests that there are more than one) will be wrapped up in their NPVs and IRRs, rather than relying on the market to provide a valuation. While I think the placing was a mistake, I remain of the view that PTG should be able to raise 100% of the capex funding for Portland in return for a revenue share, regardless of the credit crunch. Strangely, it remains possible to borrow money for longer term infrastructure projects from UK banks, despite the credit crunch. I sit on a board that has recently borrowed an 8 digit sum from a UK lender, for just such a project, and without offering security. Real world lending is not yet dead. An important question is how will we know what the terms of a farm in deal mean for shareholders? When brokers talk about a farm in deal being worth 400p a share, or some such, what exactly do they mean? The answer is that such terms are just shorthand for a complex set of assumptions. With Portland the key variables are future storage rates, operating costs and bidder's minimum acceptable risked rates of return ("hurdle rates"). There are a variety of views in the market on all three variables. Seymour Pierce have modelled on the basis that storage rates will be constant in real terms at 40p/therm (in today's money), with the risk being a 10% escalation in capex, a 15% escalation in projected day 1 operating costs in real terms and a 3% inflation rate. On that basis the post tax risked rate of return for bidders would be around 13% for a 50% revenue share. On an unrisked basis that would be a 14% IRR. The company, on the other hand, appear to take the view that storage rates will remain relatively flat until 2012, then rise rapidly in the period up to 2020, flattening off thereafter in real terms. The company appears to assume a minimum starting rate of 30p/therm in 2011, rising to 41p by 2014, with average 5% p.a. real increases in prices till 2019, and none thereafter. These prices, it is claimed, are minima and do not reflect the extrinsic premium that PTG expect to be able to command. The company also assumes that operating costs will be 6p/therm (presumably in today's money - this is higher than the Seymour Pierce figure), although these should be offset by operational charges (the Seymour Pierce operational cost may be lower than the company's because of this factor, which is bundled into the SBU fee structure, where there are additional charges for injection and removal of gas). Ignoring any offset from operational charges, the company's figures also imply a post tax risked rate of return for a 50% revenue share of around 12.5%. As I understand it, Daniel Stewart, don't differ greatly on future storage prices, but expect bidders to demand a greater risked return. The following table sets out my calculation of the revised revenue share required by the bidder to deliver a given risked rate of return ("IRR"), using either the company's or Seymour Pierce's assumptions on storage rates, costs and cost risks: Implied Revenue Share for Bidder Target IRR share price Assumptions Company Assumption 12.5% 48% 50% 15% 62% 65% 17.5% 77% 80% Any valuation of PTG is clearly linked to its ultimate revenue share from Portland. While I would expect bidders to value their potential share of Portland on the basis of a target IRR, I am less convinced that using the converse of an IRR, that is an NPV, to calculate a share price valuation for PTG is meaningful. That said, it is a starting point. An alternative would be to calculate the profits in say 2014 and calculate a market cap based on a multiple of dividend yield (i.e. a utility type PE) and then calculate this value in today's money. The problem with both approaches is that we are trying to value an asset based on future expectations of cashflows, which are always prone to a high degree of error and uncertainty (in both directions). Such methods give a very wide spread of valuations depending upon the input assumptions. My preferred method is to use a takeout valuation: if the bidder is prepared to invest up to £550M for X% of the post tax revenue share, it seems reasonable to assume that someone would be prepared to buy £550M*(1-X)/X for the remainder of the post tax revenue share. On that basis, using the Company's figures (excluding any extrinsic value premium for storage prices) I calculate the following valuations for PTG's share of Portland: Bidder's Revenue Share Value of PTG's Share (pence per share) 50% 580p 55% 480p 60% 395p 65% 320p 70% 260p 75% 200p 80% 150p These figures are only intended as a rough guide and will clearly vary depending upon your view of cost risks and future storage prices. They are also influenced to a lesser extent by your view on the discount rate (I have used a figure of 8%) since I have valued each parties share of the revenue using an NPV calculation. However, since it is a relative valuation, the criticism of NPVs made above is largely countered, and indeed if the valuation was done simply on the long term ratio of revenue for the two parties you would get a similar result. I hope that this table will prove to be a useful rough guide when evaluating the terms of the farm in bid, as and when it is agreed, since it will no doubt be couched in terms of capex covered for a given percentage of revenue share, rather than in pence per share terms. From the table it is evident that if you believe that bidders will want a 15% risked rate of return then the shares are not worth much more than say 350p including Larne. If the risked rate of return were 17.5% then you could drop that figure to 180p, which would appear to be Daniel Stewart's position. Investors in PTG can draw comfort, however, from takeout prices for other UK storage facilities, agreed in less volatile times, when gas supplies were considered more secure and the outlook for spot rate volatility was more benign. These suggest that buyers are prepared to invest at risked rates of well below 15%.
eacn: holism, I have posted my views on "fair value" for PTG previously - see posts: 90, 181, 285, 386, 447, 475, 478, 513, and 591 for a running commentary on this issue. I have, however, warned that fair value, particularly with companies where the cashflow is many years in the future, does not necessarily determine the share price - see post 625 for example. Based on the recent presentations published on the PTG web site, and changes to operating cost expectations included in a recent Seymour Pierce note (15% increase in operating costs, 10% increase in construction cost to £550M), I have updated my model parameters and obtain the following "fair values" based on the net present value of future cashflows: Seymour Pierce Assumptions: cira £5 Company Assumptions: circa £7 to £9 Seymour Pierce have assumed that storage prices will track the inflation rate (i.e. no real increases in prices), that the discount rate is 8% and that inflation will run at roughly 3%. The Company, however, assume that prices will escalate in the early years and then stay there. The range of valuations based on the companies assumptions reflects the uncertainty in the price escalation from 2011. Following the placing I have concluded that the company has taken such a bullish view on future gas storage prices so as to bolster their negotiating stance in the ongoing farm in discussions. If there was no pressing need for the cash (and whatever the company may say about keeping the larne drilling program on track, there is no pressing need) no-one would place stock at 355p if they genuinely believed these future gas storage price projections (since the stock would be worth twice the placing price), particularly if by so doing they were to undermine their position in crucial negotiations with potential farm in partners. My guess is that farm in partners have poured cold water on these bullish assumptions and are arguing for terms that would value PTG's share of the project at 400p or less. This would be consistent with a placing at 355p, which is roughly 10% below a 400p valuation, reflecting the 'normal' discount for placings. A 400p valuation would also be consistent with a current storage price of 30p a therm (which is roughly where it would be today if Portland were operational based on current Rough figures) with no escalation in real terms over the lifetime of the valuation (i.e to 2050 since all my NPVs for this time period) and a discount rate of 8%. I am sure the management will be arguing for a better deal, but on the evidence of the recent placing, it would appear that they will probably settle for a 400p valuation if the farm in partner picks up the full development cost for 50% of the revenue stream and offers some kickbacks if gas prices escalate in the way the company project. This is not of course the price at which the board would be prepared to sell Portland outright: you would might a 30% to 40% premium for control imo, suggesting a take-out price for Portland alone of 500p to 550p. If there is no take-out, a farm in on the above terms will allow for significant further appreciation in the share price over the next 3 to 5 years if the company's bullish assumptions on gas storage pricing prove correct. Indeed a farm in partner will be able to say that PTG shareholders will still see 50% of the benefit of price appreciation it that does indeed occur and may be prepared to structure the deal so as to hand over more than 50% of such appreciation, thereby netralising any argument management may have for a higher price today.
eacn: min123golf2, If the company's recent presentations (see PTG web site) are to be believed then the future for the Portland project is a rosy one for a number of reasons: 1. PTG expect that the price of gas storage will increase markedly over coming years, as a result of rapidly declining flexibility in th gas supply market 2. PTG's CAPEX for Portland will be significantly lower than for its rivals because there is no need for cushion gas at Portland and with gas prices increasing this adds to the cost of construction / commissioning rival stores 3. PTG are confident of obtaining at least a 10p to 20p margin over Rough on intrinsic pricing alone because of their lower injection and withdrawal times. This is because they can inject at a lower average price and withdraw at a higher average price. 4. PTG also expect to obtain an extrinsic premium over Rough, although they have not explicitly quantified this. However on the basis of the figures they have used in their presentations a conservative estimate of the additional value to be extracted from their short cycle times is at least another 5p and probably significantly more than that. Adding up all of these factors it would appear highly likely that PTG can start operations at 40p / therm and that this price will escalate rapidly. The effect on the NPV is significant and suggests that the farm in partner will get more than a 11% IRR on a £500M investment if they receive 50% of the net revenue after OPEX and take all of the capital allowances. If this is true I would expect the company to be pressing for a lower than 50% share or a capital payment to the company in addition to the £500M investment. The problem with all this is that the same assumptions imply that the shares are worth somewhere between 550p and 750p and yet the directors have just agreed to place shares at 355p. Now placings are normally at a discount, but not that sort of discount. What's more it is not apparent why the companny needed to raise cash now, rather than waiting until the conclusion of the farm in negotiations, which are meant to be complete by late summer. After all the balance sheet supposedly still has over £1M of cash. Now I happen to think that the company's assumptions are broadly correct, but I also think that this placing will have weakened their hand in any farm in negotiations and was therefore inept. I have written to the company to express my displeasure at the handling of the placing. It will be interesting to see whether I receive a meaningful reply. In the mean time I still think this is a reasonable bet, but clearly PI's have had their confidence shaken by the placing, and in the current market any selling will have a disproportionate effect on the share price.
mina123golf2: The speculation on PTG share price after planning permission is granted (IF)is nothing more than a wild guess. Todays price is £3.28 - if planning permission were given today the price would without a doubt shoot up BUT almost certainly, after 2 or 3 days settle back down to a modest increase which is likely to be around £3.90. This is always the case when "good news" is expected and finally appears. The target price of £5.50 may well be achieved but this will take a considerable time and will not be without many hiccups along the way.
eacn: 60ken, I have been researching Question 1 for some time. This turns out to be a complex subject, which I can only summarise here. Let's start with price. How much can PTG expect to get for the rental of its storage space? Gas storage pricing is dependent upon two factors: the intrinsic value of storage, which is effectively the difference in value between summer and winter gas prices; and, the extrinsic value, which is the additional value to be extracted from storage through shorter term trading of volatility in gas prices (both spot and forward). The extrinsic component of the storage price is therefore a function of the cycle time for the storage (which loosely reflects the speed at which gas can be withdrawn from storage - withdrawal and injection times are in fact asymmetric: for Rough it takes c. 167 days to inject and c. 76 days to withdraw). The shorter the cycle time, the higher the extrinsic value, because shorter cycle times allow users of the facility to take advantage of price spikes in the market. Salt caverns have low cycle times. PTG expect the Portland facility to have a cycle time of 100 days compared to say Rough at circa 250 days. Being able to take advantage of short term price spikes is a form of volatility trading. The profit to made from such trading is a function of the volatility of the spot and forward gas price. Modelling this profit function is complex. Few public models exist, and those that do fail to take account of the potential for intraday profits in these markets, which can be significant. Seymour Pierce take the view that PTG's cycle time should allow PTG to sell storage at twice the price of the five year forward price for storage at Rough, which is currently 20p/therm for 2011/12, suggesting a price for PTG storage of 40p/therm. They provide no backing for this calculation. If we take Hornsea, a salt cavern with 11.5 bcf of capacity and a withdrawal time of 18 days (330m cubic metres injection rate of 2, cu m/day and withdrawal at 18.5m cu m/day – total cycle time of c. 182 days), Scottish and Southern Energy have sold storage at rates of between 41.7p and 54.2p per Standard Bundled Unit ("SBU") A SBU consists of 1kWh of deliverability, 0.11 kWh of injectability and 17.9 kWh of storage space for a period of 1 year. Furthermore Hornsea charge 0.024p per kWh for injection and 0.008p per kWh for withdrawal. Hornsea has a total capacity of 195M SBU's. In 2005/06, Hornsea delivered an operating profit of £27.3m, on an average SBU price of 16.5p, suggesting annual costs of around £4.9m. At current price levels of around 45p, assuming costs remain constant, OP is probably around £82m. For an annuity business with a genuine long term operating horizon, that suggests a valuation of at least £600m. PTG are projecting a withdrawal and injection rate of 20m cu m/day on a total storage volume of 1,000m cu m (35 bcf), giving a total cycle time of 100 days and a withdrawal time of 50 days. Compared to Hornsea, the longer withdrawal time reduces the extrinsic value of the storage, while the shorter overall cycle time increases extrinsic value. Because PTG have a longer withdrawal time, but a shorter overall cycle than Hornsea, the price that Portland can command relative to Hornsea, will depend on medium term rather than short term volatility as well as the intrinsic value of gas storage (i.e. the difference between summer and winter gas prices). There is a broad consensus that without gas storage intrinsic differences between summer and winter gas prices will significantly increase as North Sea gas reserves dwindle. Storage (of all types and cycle times) will serve to diminish this intrinsic effect, but storage will only be built if storage prices generate sufficient returns for investors in storage capacity. Storage capacity will therefore reduce intrinsic values, but not eliminate them, unless excess capacity is built. At present there is little prospect of there being over capacity in UK storage, particularly at the short cycle end of the market. There is a scarcity of sites suitable for such storage and there are significant barriers to entry (viz. planning permission). If PTG were price simply on intrinsic value 20p/therm is probably as good a guess as any as to the long term intrinsic value of storage, assuming that the UK can construct storage to cover 25% of UK annual gas volumes. While there may be an upward pressure on this price in the next 5 to 10 years, as a result of under capacity in UK storage, market forces are likely to correct this in the longer term, since depleted field storage is not scarce, albeit expensive to operate because of the need for cushion gas. It would appear that short term storage is going to be at a premium in the UK, since there are a limited number of suitable sites. This is likely to increase the short term volatility in the market during winter months. While the construction of LPG facilities may cap the price spikes, this is unlikely to have a major effect on the overall volatility of the spot and forward gas markets (volatility being a measure of the rate of change of price, rather than the price itself). This suggests that the extrinsic value of short term storage will increase, rather than diminish, with time. Furthermore, this increased volatility is likely to be most noticeable over the medium rather than the short term, since LPG will act as a brake on extreme short term price spikes. This is a big positive for PTG, who can offer users 3.5 shots at the extrinsic value cherry in one year, compared to two shots at Hornsea. I do therefore expect PTG to be able to price at a significant premium to Rough and possibly at less of a discount to Hornsea than is commonly supposed. At 42p a SBU, Hornsea is pricing at roughly 70p/therm on a withdrawal time of 18 days but with an overall cycle time of 182 days, versus Rough at 20p/therm on a withdrawal time of 76 days and an overall cycle of 243 days. PTG's withdrawal time of 50 days with an overall cycle time of 100 days suggests to me that 40p is eminently achievable given that they will offer the same instrinsic value as Rough (i.e. 20p) plus at least 2 opportunities per annum to extract extrinsic value from the storage facility. At 40p a therm PTG would be worth 1.74 times Hornsea ( (40p/70p)*(35bcf/11.5bcf) = 1.74), or £1,050m if you accept my valuation for Hornsea of £600m. Assuming construction costs of £350m that gives an EV of £700m or roughly £9 a share if you assume 15% dilution for the CB needed to fund the construction. Interestingly my NPV model yields a very similar result. Assuming a £350m capital injection in 2009 to fund construction and capacity coming on stream in 2011 (25%), 2012 (50%), 2013 (100%), a time horizon of 2030, inflation of 3%, operating costs of £15m p.a. (three times Hornsey), a storage price of 40p/therm and equity dilution of 15%, I have an EV of £705m and a share price of £9. For someone buying the business for £705m the projected IRR is 11%, which is the sort of return a utility might be happy to accept. Clearly any purchaser of PTG post planning would not expect to pay full value, but £5 would seem a more than reasonable price.
Portland Gas share price data is direct from the London Stock Exchange
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