WA Industrials: Remote Power

Transcription

1 WA Industrials: Remote Power Pacific Energy Ltd (PEA) PACIFIC ENERGY LTD (PEA) The power provider for remote Australian mines Pacific Energy Limited, through its core business division Kalgoorlie Power Systems (KPS), builds and maintains power stations for resource companies that don t have access to grid power. KPS has ~205MW of contracted capacity spread across 19 sites. The contracts are take-or-pay and installed KPS power stations generally remain in situ for the mine life based on initial development reserves (typically five to ten years for a green field project). Usually if mine reserves are increased the contracts are extended. The industry prices the capital based on the current reserve mine life, and subsequent extensions to mine life can result in margin expansion. Capital intensive, but with long term contracts PEA takes residual risk on the equipment (the power plants have a useful life of 20 years, but the contracts are only 5-10 years) and the mine client usually pays higher margins than the useful life would imply, however, the bulk of the high margin performance of the KPS business is the result of cost structure competitive advantage which has been incrementally improved through innovation. The redeployment of equipment can work to PEA s favour improving utilisation rate over the long run. On the downside, PEA takes considerable risk on major macro cycle downturns if it can t redeploy (survived GFC well). PEA installs and maintains the power generation equipment for each of its mine clients. Consequently, there are economies of scale regarding maintenance & service activities. PEA wins business on the basis of industry benchmark equipment costs, fuel efficiency and lower operating costs due to automation and innovation. Major clients are Anglo-Gold, Newmont, Regis and Sandfire. PEA main contracts are at Tropicana (AGG) for 44MW to 2028, Newmont 33MW to 2016 (mine life ~2028), Regis 25MW to and Sandfire 20MW to New opportunities include Sirius (~14MW), and existing clients Doray (Deflector deposit ~4MW) and Metals X (Meekatharra ~8MW). Re-start of existing KPS power stations for Saracen (Thunderbox ~14MW) and Poseidon (Maggie Hays ~14MW), as well as traditional mine life extensions, are also looking more likely within the next months. Hartleys expects FY15 EBITDA $32.1m, FY16 $35.0m PEA guidance for FY15 is EBITDA of $32-34m, which implies 2H EBITDA of $ m. We expect 2H EBITDA of $16.9m. Current contract capacity is 205MW, with Company targeting 240MW by 2015 end. We expect average installed generators in FY16 of 230MW, for EBITDA of $34.6m. Company guidance is to maintain the 2.5cps dividend into the foreseeable future. Re-initiating with Buy and $0.55 twelve month price target We were restricted from formal research given the named role in the 8 Apr 2015 Share Price: $0.45 Valuation: $ mth price target: $0.55 Brief Business Description: PEA owns and maintains remote mine power stations. Hartleys Brief Investment Conclusion Baseline revenue supported by long term contracts with growth from WA mining cycle. Chairman & CEO: Cliff Lawrenson (Chairman) Top Shareholders: Ken Hall: 49.8% Pacific Road: 22.9% Company Address: 338 Gnangara Rd, Landsdale, WA, 6065 PEA.asx Buy Issued Capital: - fully diluted Market Cap: - fully diluted Net Debt 31 Dec (a): 369.4m 373.8m $166.2m $168.2m $27.3m FY14a FY15e FY16e Op Cash Flw Free Cash Flw NPAT (A$m) NPAT (A$m)* EPS (cps)* P/E (basic) 11.2x 13.1x 12.5x P/E (norm) 9.5x 11.4x 10.8x EV / EBITDA 5.6x 6.0x 5.5x DPS (cps) Franking 100% 100% 100% Dividend Yield 5.6% 5.6% 6.7% N.D. / equity* 22% 15% 26% Source: Hartleys Research *Normalised A$ M Authors: Trent Barnett, CFA Head of Research / Industrial Analyst Ph: E: trent_barnett@hartleys.com.au buyback on 20 March We are now re-initiating our coverage. We like Hartleys acted as broker to an on-market PEA for its contracted revenue and growth prospects. The business is buyback in the past 12 months for Pacific capital intensive, but can be funded via HP debt and PEA effectively has Energy Limited shares, for which it has earned fees. See back page for details. contracted revenue. We believe PEA should be valued on a DCF basis. We have a 55cps twelve month price target (implies FY16 P/E of 13.2x). Hartleys Limited ABN (AFSL ) 141 Page St Georges 1 of 20 Terrace, Perth, Western Australia, 6000 Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Further information concerning Hartleys regulatory disclosures can be found on Hartleys website Apr-14 Pacific Energy Aug-14 Dec Apr-15 Volume - RHS Source: IRESS PEA Shareprice - LHS Sector (S&P/ASX SMALL INDUSTRIALS) - LHS

2 Pacific Energy Ltd (PEA) Company Information Profit & Loss ($m) 6/13A 6/14A 6/15E 6/16E Date 8 Apr Gnangara Rd, KPS MW capacity (end) Share Price $0.450 Landsdale, WA, 6065 KPS MW installed (avg) Week High-Low $ $0.39 Ph: KPS Revenue Market Cap ($m) $166.2 Fax: Other Revenue, inc Wst Heat Enterprise Val ($m) $ Group Revenue Ordinary Shares growth 27.6% 12.8% -1.2% 3.5% Fully Diluted Shares COGS ex Deprec. & Amortis Gross Profit Valuation margin 93.6% 94.3% 92.1% 92.1% Spot DCF (WACC 10.8%, Terminal growth 0.00%) $0.56 Head Office Costs EBITDA - Group mth fwd DCF (WACC 10.8%, Terminal growth 0.00%) $0.59 growth 29.8% 23.5% -6.8% 9.2% 12mth P/E (diluted) of 12x (Premium to peak micro cap comps) $0.56 EBITDA / Sales 68.4% 74.9% 70.7% 74.5% 1x nta $0.29 Depreciation mth fwd Div Yield of 4.7% (Gross up yield=bankbill +400bp) $0.64 EBITA Months Price Target (wgted avg above 4 avg) $0.55 EBITA / Sales 51.7% 56.3% 51.9% 53.9% Fully diluted P / E (6/15E) at price target 14.0x Cash Net Interest Fully diluted P / E (6/16E) at price target 13.2x Normalised Pretax Profit EV/EBITDA (6/16E) at price target 6.5x Pre tax abnormals EV/EBITA (6/16E) at price target 8.9x Reported Pretax Profit Dividend Yield (6/16E) at price target 5.4% Reported Tax Free cash flow yield (6/16E) at price target -4.2% Reported Profit to equity Multiples (S/price at $0.450) 6/13A 6/14A 6/15E 6/16E Normalised Tax P / E (reported, basic weighted) 12.4x 11.2x 13.1x 12.5x Normalised Tax Rate 25.0% 27.0% 30.0% 30.0% P / E (normalised, fully diluted, wgted) 11.4x 9.5x 11.4x 10.8x Normalised NPAT P / E (full dil mkt cap / norm. NPAT) 11.9x 9.8x 11.4x 10.8x Minorities Dividend Yield 2.2% 5.6% 5.6% 6.7% Normalised NPAT to equity Group Free Cash Flow (f.c.f) / EV -6.3% 5.3% 8.5% -2.7% Norm. Net Profit / Sales 34.9% 37.6% 32.6% 33.2% Equity f.c.f. / Mkt Cap -9.8% 3.7% 3.5% -9.5% Norm f.c.f. / Mkt cap -9.8% 3.7% 3.5% -9.5% Mkt cap / operating cash flow 7.4x 6.7x 7.2x 6.3x Reported EPS (basic, weighted) EV/EBITDA multiple 7.0x 5.6x 6.0x 5.5x Normalised EPS (dil, wghtd) EV/EBITA multiple 9.2x 7.5x 8.2x 7.7x DPS (cps) Price / Book Value 1.4x 1.3x 1.3x 1.3x Franking 100% 100% 100% 100% Price / NTA 1.9x 1.7x 1.6x 1.5x Payout Ratio 25.4% 52.9% 63.1% 71.7% Ratios 6/13A 6/14A 6/15E 6/16E Return on Average Equity 13.0% 14.2% 11.6% 11.9% Cashflow Statement ($m) 6/13A 6/14A 6/15E 6/16E Return on Assets 8.9% 9.7% 8.3% 8.4% EBITDA ROIC (EBITA / Work. Cap + fixed assets) 18.4% 18.5% 17.4% 17.3% Working Capital Change ND / Equity 26.3% 21.7% 15.1% 25.6% Cash from Operations ND / ND + Equity adjusted 20.8% 17.9% 13.2% 20.4% Net interest Paid Net Interest Cover (EBIT) Tax Paid Free Cash Flow Analysis 6/13A 6/14A 6/15E 6/16E Net Operating Cash Flow Net Operating Cash Flow Capital Expenditure Capex (Reported) Asset Sales Group Free Cash Flow (rep'ted) Other (inc Investments) Fixed Debt Repayments Net Investing Cash Flow Equity Free Cash Flow (rep'ted) Proceeds from Equity Issues HP Lease Capex (non-cash) Net Change in Debt & Leases Free Cash Flow (normalised) Dividends Paid Capex (inc HP) / depreciation 510% 170% 76% 325% Net Financing Cash Flow Movement in Cash Share Data 6/13A 6/14A 6/15E 6/16E HP Lease Capex (non-cash) Ord Issued shares (m) Balance Sheet ($m) 6/13A 6/14A 6/15E 6/16E growth 2.2% 0.8% 0.9% 0.4% Cash Weighted ave shares (m) Receivables growth 1.3% 1.6% 0.9% 0.7% Inventories Diluted shares wgted (m) Other growth -3.5% 1.3% 2.2% 0.0% Total Current Assets Property, Plant & Equipment Unpaid Capital Intangibles Year Expires Number % ord Avg Price $m unpaid Other Jun , % $ 0.46 $ 0.4 Total Non Current Assets Jun-16 1,500, % $ 0.50 $ 0.8 Total Assets Jun-17 1,000, % $ 0.60 $ 0.6 Accounts Payable Jun-18 1,000, % $ 0.70 $ 0.7 Interest Bearing Liabilities Jun % $ - $ - Other TOTAL 4,400,000 1% $ 0.56 $ 2.5 Total Current Liabilities Accounts Payable Directors & Senior Management Substantial Shareholders Interest Bearing Liabilities Cliff Lawrenson (Chairman) Ken Hall 49.8% Other Stuart Foster Pacific Road 22.9% Total Non Current Liabilities Louis Rozman Total Liabilities Ken Hall Net Assets CFO & Company Secretary: Adela Ciupryk Net Asset Value / Share ($) NTA / Share ($) Net Debt (net cash) Analyst: Trent Barnett Last Earnings Estimate Changes: 8 Apr 2015 Phone: Sources: IRESS, Company Information, Hartleys Research Buy Page 2 of 20

3 The PEA is an owner of small power stations located at mines in Australia, and also owns two hydro power stations in Victoria. BUSINESS OVERVIEW Pacific Energy is an owner of diesel and gas-fuelled power stations co-located at mining & mine processing operations. The main business is Kalgoorlie Power Systems (KPS), a leading provider of remote electricity generation infrastructure to mine sites in WA, NT and SA. KPS has 19 power stations with installed capacity of approximately 205MW. PEA also owns two small hydro power stations in Victoria - the Cardinia (3.5MW) and Blue Rock (2.5MW). They both have long term off-take agreements with EnergyAustralia. KALGOORLIE POWER SYSTEMS (KPS) Kalgorlie Power Systems (KPS) was purchased by PEA near the height of the financial crisis in December The transaction settled in May KPS runs a Build / Own / Maintain business model to supply power to Australian mines that are not connected to grid supply for electricity. Typically each mine has ~2-20MW electricity requirement. KPS charges a simple contracted $/Kwh charge rate, subject to a minimum monthly charge. The miner supplies and pays for fuel. The contracts are typically for the project life of the mine (usually 5-10yrs). As mine lives are extended, the contract can be renewed. If contracts are not renewed, the equipment can be moved to a new client (provided KPS has a new client). The contracts usually contain a break fee, that if the mine closes early PEA is entitled to a termination fee equal to around 18mths of revenue (obviously the payment and timing of a termination fee is uncertain if the client entity goes into administration). Consequently, although KPS is capital intensive, the risk to PEA of mine closures is lower (provided a mine closure still allows the miner to pay creditors) than many other mining service companies we look at (for example contract miners). The KPS advantage? KPS capital costs are similar to competitors given KPS buys the equipment from third parties. Customers may choose to use KPS for a number of reasons including; 1) Cash flow: KPS funds all of the capital costs 2) Fuel Efficiency: KPS systems and experience allow fuel saving benefits to the customer (fuel makes up around 80% of the power operating costs). 3) Lower operating costs: KPS automation and maintenance of many aspects of the plant reduces labour and equipment costs which it can pass on to customers. Page 3 of 20

4 PEA is converting the Tropican power station from diesel to gas, and the Carosue project to duel fuel. The Company estimates that every 100MW of waste heat recovery units generates PEA ~$6.0m of EBITDA for PEA with diesel at ~A$1/litre. Conversion to gas PEA is converting the Tropicana (44MW) power station from diesel to gas. The converted gas fuelled power station is expected to be completed and commissioned by 20 July We estimate capex of $18M (change out of diesel generators to gas). PEA have negotiated an increase in contract revenue in accordance with the usual KPS return parameters. KPS is also converting the 10MW Carosue Dam Project power station from 100% diesel to an 11 MW dual fuelled (70% gas, 30% diesel) operation. Waste heat recovery KPS has a proprietary waste heat recovery technology that improves fuel efficiency by ~7%. There is additional capex, and the profit contribution depends on the fuel price. The Company estimates that every 100MW of waste heat recovery units generates PEA ~$6.0m of EBITDA for PEA with diesel at ~A$1/litre. This is after the client receives cost saving as well. We estimate that capex is ~$15-20m per 100MW retro-fitted with the equipment. Currently PEA has ~8MW of waste heat recovery units installed with 24MW scheduled to be installed and operating by September We assume minimal contribution from the units until FY17, when we assume ~100MW installed and ~$4.5m EBITDA (rising to $10m EBITDA in FY18 when we assume diesel prices of $1.50/l). Fig. 1: Waste heat recovery Source: FY14 AGM presentation Page 4 of 20

5 PEA Terminology Installed Capacity: generators that are installed and are currently generating revenue.. Contracted Capacity: Installed capacity plus contracts for generators that are yet to be installed and so are not earning revenue yet. Capacity: Contracted capacity plus generators that are owned/leased by PEA that are not earning revenue and are available to be used for new contracts. KPS build, own, maintain and fund 100% of power station capital cost. It only charges a fixed monthly tariff after mine commissioning. This releases mine owner capital funding for other mine related investment. Fig. 2: Typical KPS power station Source: PEA FY08 Annual Report Page 5 of 20

6 PEA owns two small hydro power statio ns in Victoria. The contribution to the Group is small (~$0.7m EBITDA pa) HYDRO POWER Renewable electricity generation from the Blue Rock Dam and Cardinia Reservoir power station achieved 4.3GWh and 8.6GWh during calendar 2009 (versus 4.3GWh / 8.5GWh in 2008 and 2.2GWh / 6.8GWh 2007). Fig. 3: Hydro Power Locations 1) Cardinia Reservoir Hydro Power Station 2) Blue Rock Dam Hydro Power Station Source: PEA Blue Rock Power Station The Blue Rock Power Station is a 22,000 Volt and 2.6MW rated capacity hydroelectric facility, located at Blue Rock Dam, approximately 130km east of Melbourne in the Latrobe Valley. The Blue Rock Power Station was developed, designed and is project managed by Pacific Energy, with turbines and generators supplied by Kvaerner. The sole off-taker for the renewable energy produced is TRUenergy. Page 6 of 20

7 Cardina Hydro Power Station The Cardinia Power Station is a 22,000 Volt and 3.5MW rated capacity hydroelectric facility, located at the Cardinia Reservoir, 40km east of Melbourne, Victoria. It was developed, designed and is managed by Pacific Energy personnel, with turbines and generators supplied through Kvaerner. The Cardinia Reservoir is part of Melbourne s storage system. It has a maximum capacity of 290,000Ml and is known as an off stream storage, as it is supplied by pipeline, not by river. The pipeline is 12.5km long and originates at the Silvan Reservoir. This pipeline is the direct means of supplying water to the power station, as it uses the water as it enters the Cardinia Reservoir, unlike standard practice of using water pressure available at the outlet of a reservoir. TRUenergy is the sole off-taker for the renewable energy produced. Fig. 4: Cardina Hydro Penstock Source: PEA FY08 Annual Report Page 7 of 20

8 Hartleys Limited Pacific Energy Ltd (PEA) 8 April 2015 New opportunities include Sirius (~14MW), and existing clients Doray (Deflector deposit ~4MW) and Metals X (Meekatharra ~8MW). Re-start of existing KPS power stations for Saracen (Thunderbox ~14MW) and Poseidon (Maggie Hays ~14MW), as well as traditional mine life extensions, are also looking more likely within the next months. ORDER BOOK Current contracted capacity is 205MW. Most contracts are of long duration. We estimate that the average remaining life is ~6 years. There is a meaningful roll-off over coming years based on current expected mine lives. However, experience shows that often mine lives are extended, or power stations are moved to new sites. Consequently, although there appears a large gap between the order book and our estimates, we believe the risk is lower than first impression. New opportunities include Sirius (~14MW), and existing clients Doray (Deflector deposit ~4MW) and Metals X (Meekatharra ~8MW). Re-start of existing KPS power stations for Saracen (Thunderbox ~14MW) and Poseidon (Maggie Hays ~14MW), as well as traditional mine life extensions, are also looking more likely within the next months. Fig. 5: MW Order book runoff Unnamed MW required to meet Hartleys assumptions Identified new prospects Order book Source: Hartleys Research Estimates Page 8 of 20

9 Key customers KPS has a diverse client list that includes Anglo-Gold, Regis, Newmont, Sandfire and Iluka. The hydro power stations both have off-take agreements with TruEnergy. Fig. 6: KPS Customers Source: PEA Page 9 of 20

10 Fig. 7: KPS Customers PEA main contracts are at Tropicana (AGG) for 44MW to 2028, Newmont 31MW to 2016 (mine life ~2028), Regis 50MW to and Sandfire 20MW to Source: PEA INDUSTRY EXPOSURE PEA (through KPS) is exposed to the Australian mining industry (and within that, predominantly exposed to the Gold sector). The largest clients are Anglo-Gold, Regis, Newmont, Iluka and Sandfire. GEOGRAPHIC EXPOSURE PEA (through KPS) is predominantly exposed to Western Australia, although we expect the Company to increasingly win projects across Australia. Fig. 8: Geographic Spread Hartleys Research Page 10 of 20

11 Contract Power Management, ENE.asx and owner operators are the main competitors for KPS. Cummins is the main supplier ( Installation is done inhouse by PEA. PEERS, PARTNERS & COMPETITORS Contract Power Management, ENE.asx and owner operators are the main competitors for KPS. SFR has also signed a contract with juwi Renewable Energy Pty Ltd to construct a 10.6MW solar power. The Agreement is subject to various conditions including final funding which the parties expect will be satisfied by 1 May Should the station be successful, we expect juwi will be another competitor for PEA. SUPPLIERS & CUSTOMERS Key suppliers Cummins is the main supplier ( Installation is done in-house by PEA. The installation includes turn-key solution for a greenfield power plant (usually takes 5-6 months from contract signing). PEA can also convert diesel stations to duel fuel or gas. The fuel is supplied by the client. Page 11 of 20

12 xx Hartleys Limited Pacific Energy Ltd (PEA) 8 April 2015 Economic Exposure of Board and key management MANAGEMENT, DIRECTORS AND MAJOR SHAREHOLDERS Total Options Ordinary Total Shares Economic Position Exposure rank Directors Cliff Lawrenson Chairman 1,020,000 1,020,000 3 Ken Hall Executive Director 184,718, ,718,244 1 Stuart Foster Non-Executive Director 4,063,442 4,063,442 2 Louis Rozman (Pacific Road, major s/holder) Non-Executive Director No direct holding 0 4 Greg Dick (Pac Road Alternate Director) Non-Executive Director No direct holding Source: PEA, various MAJOR SHAREHOLDERS Ken Hall (the KPS vendor) is the largest shareholder with ~50%. Ken Hall, the KPS founder, owns 50% of the ordinary shares. Pacific Road Capital (Pacific Road) is a private equity firm with 23.1%. They have a nominated director, Mr Louis Rozman (Greg Dick an alternate), on the Board. Fig. 9: Top Shareholders Substantial Shareholders % ownership Ordinary Ken Hall 50.3% Pacific Road 23.1% Source: Hartleys Page 12 of 20

13 FINANCIALS PROFIT & LOSS PEA guidance for FY15 is EBITDA of $32-34m, which implies 2H EBITDA of $ m. Company guidance PEA guidance for FY15 is EBITDA of $32-34m, which implies 2H EBITDA of $ m. Current contract capacity is 204MW, with Company targeting 240MW by June. Company guidance is to maintain the 2.5cps dividend into the foreseeable future. Hartleys Forecasts We expect FY15 EBITDA of $32.1m. We expect FY16 EBITDA of $35m. Fig. 10: PEA P&L Profit & Loss ($m) 6/13A 6/14A 6/15E 6/16E KPS MW capacity (end) KPS MW installed (avg) KPS Revenue Other Revenue, inc Wst Heat Group Revenue growth 27.6% 12.8% -1.2% 3.5% COGS ex Deprec. & Amortis Gross Profit margin 93.6% 94.3% 92.1% 92.1% Head Office Costs EBITDA - Group growth 29.8% 23.5% -6.8% 9.2% EBITDA / Sales 68.4% 74.9% 70.7% 74.5% Depreciation EBITA EBITA / Sales 51.7% 56.3% 51.9% 53.9% Cash Net Interest Normalised Pretax Profit Pre tax abnormals Reported Pretax Profit Reported Tax Reported Profit to equity Normalised Tax Normalised Tax Rate 25.0% 27.0% 30.0% 30.0% Normalised NPAT Minorities Normalised NPAT to equity Norm. Net Profit / Sales 34.9% 37.6% 32.6% 33.2% Reported EPS (basic, weighted) Normalised EPS (dil, wghtd) DPS (cps) Franking 100% 100% 100% 100% Payout Ratio 25.4% 52.9% 63.1% 71.7% Source: Hartleys Research Estimates Page 13 of 20

14 BALANCE SHEET Fig. 11: PEA Balance Sheet Source: Hartleys Research Estimates Gearing ratios Fig. 12: Balance Sheet ($m) 6/13A 6/14A 6/15E 6/16E Cash Receivables Inventories Other Total Current Assets Property, Plant & Equipment Intangibles Other Total Non Current Assets Total Assets Accounts Payable Interest Bearing Liabilities Other Total Current Liabilities Accounts Payable Interest Bearing Liabilities Other Total Non Current Liabilities Total Liabilities Net Assets Net Asset Value / Share ($) NTA / Share ($) Net Debt (net cash) Gearing Ratios Ratios 6/13A 6/14A 6/15E 6/16E ND / Equity 26.3% 21.7% 15.1% 25.6% ND / ND + Equity adjusted 20.8% 17.9% 13.2% 20.4% Net Interest Cover (EBIT) Source: Hartleys Research Estimates The ANZ loan facilities have an aggregate facility limit of $63m and are currently drawn to ~$39M. NTA Net tangible assets at 31 December was $0.29. Most of the assets are power stations, which, while there are meaningful demobilisation costs, are able to be transported to new sites. Debt The ANZ loan facilities have an aggregate facility limit of $63m and are currently drawn to ~$39M. The Company believes it has sufficient funding for all existing and foreseeable capital expenditure and working capital requirements. Page 14 of 20

15 CASH FLOW Fig. 13: PEA Group Cash Flow Cashflow Statement ($m) 6/13A 6/14A 6/15E 6/16E EBITDA Working Capital Change Cash from Operations Net interest Paid Tax Paid Net Operating Cash Flow Capital Expenditure Asset Sales Other (inc Investments) Net Investing Cash Flow Proceeds from Equity Issues Net Change in Debt & Leases Dividends Paid Net Financing Cash Flow Movement in Cash HP Lease Capex (non-cash) Source: Hartleys Research Estimates We estimate FY15 capex of ~$6m and ~$32m in FY16 and all funded with cash flow / debt. Capex requirements We estimate FY15 capex of ~$6m and ~$32m in FY16 and all funded with cash flow / debt. Most of the capex is for the Tropicana changeover to gas, and our assumption that PEA wins the Nova power station for SIR. Given most of the other new projects are restarts of existing power stations, additional capex should be small. Page 15 of 20

16 Free cash flow We expect PEA is significantly positive free cash flow when growth slows. PEA said The Board anticipates that both the interim fully franked dividend and final fully franked dividend (1 cent per share and 1.5 cents per share respectively) will be maintained in the foreseeable future. PEA has demonstrated high returns on capital Dividends We expect PEA pay 1.5cps final FY15 DPS and 3.0cps in total for FY16. In February 2015, PEA said The Board anticipates that both the interim fully franked dividend and final fully franked dividend (1 cent per share and 1.5 cents per share respectively) will be maintained in the foreseeable future. RETURNS ANALYSIS Fig. 14: Returns Ratios 6/13A 6/14A 6/15E 6/16E Return on Average Equity 13.0% 14.2% 11.6% 11.9% Return on Assets 8.9% 9.7% 8.3% 8.4% ROIC (EBITA / Work. Cap + fixed assets) 18.4% 18.5% 17.4% 17.3% Source: Hartleys Research Estimates. SENSITIVITIES FX exposure PEA is exposed to exchange rates in as much as it affects the profitability of existing mining customers and the viability of green field sites. Interest Rate exposure PEA does not have significant exposure to interest rates given market interest bearing debt is small and predominantly hedged. However, we would expect PEA to ultimately be valued on a DCF basis, and therefore sensitive to WACC assumptions. Commodity price exposure Fuel costs are worn by PEA s clients. However, PEA is exposed to commodity prices, especially gold, in as much as it affects the profitability of existing customers and the viability of green field sites. Page 16 of 20

17 We expect PEA can grow revenue through power station restarts, conversions and waste heat recovery, with only a small number of new builds required Fig. 15: Hartleys Detailed Profit Estimates 6/14E 6/15E 6/16E 6/17E Actual New New New KPS MW capacity (end) KPS MW installed (avg) revenue / installed EBITDA / installed Group Revenue EBITDA - Group EBITDA / Sales 74.9% 70.7% 74.5% 75.6% Depreciation EBITA EBITA / Sales 56.3% 51.9% 53.9% 54.8% Cash Net Interest Normalised Pretax Profit Pre tax abnormals Reported Pretax Profit Reported Tax Reported Profit to equity Normalised Tax Normalised Tax Rate 27.0% 30.0% 30.0% 30.0% Normalised NPAT Minorities Normalised NPAT to equity Norm. Net Profit / Sales 37.6% 32.6% 33.2% 34.4% Reported EPS (basic, wght) Normalised EPS (dil, wghtd) DPS (cps) Franking 100% 100% 100% 100% Payout Ratio 52.9% 63.1% 71.7% 83.9% Capex (inc HP) Net Debt (net cash) Source: Hartleys Research Page 17 of 20

18 PRICE TARGET We have a 12 month risk weighted price target of $0.55. PEA Price Target Methodology Weighting Current 12 mth out DCF (WACC 10.8%, Terminal growth 0.00%) 40% $0.56 $ mth P/E (diluted) of 12x (Premium to peak micro cap comps) 45% $0.50 $0.56 1x nta 10% $0.29 $ mth fwd Div Yield of 4.7% (Gross up yield=bankbill +400bp) 5% $0.54 $0.64 Risk weighted composite $ Months Price Target $0.55 Shareprice - Last $ mth total return (% to 12mth target + dividend) 28% Source: Hartleys Estimate RECOMMENDATION & RISKS INVESTMENT THESIS & RECOMENDATION Because of the residual risk that PEA takes on the equipment (the power plants have a useful life of 20 years, but the contracts are only 5-10 years) the mine usually pays higher margins than the useful life would imply. This can work to Pacific Energy s favour if it can operate at a high utilisation rate over the long run (but on the downside PEA takes risk on major macro cyclical swings). We are re-initiating coverage on PEA with a Buy recommendation. We like PEA for its contracted revenue. The business is capital intensive, but can be funded via HP debt. The business cycle risk, while still considerable, can be reduced through client diversity. The contracts are also structured such that PEA should be compensated long enough to put redundant equipment back to work in the event there is early contract termination. RISKS The key risk for PEA is earnings disappointments given the industry is volatile and earnings can disappoint due to cost overruns, project delays, loss of contracts or slower than anticipated new project wins. Although some earnings disappointments can be short term and just a timing issue, other disappointments can be materially value destructive and can sometimes overhang stocks for a long period of time (for example contract disputes). Such disappointments can be very difficult to predict and share price reactions can be severe and immediate upon disclosure by the company. Working capital funding can also be a risk for small companies in the current environment. Trading liquidity in PEA is very light. Page 18 of 20

19 EV/EBIT BANDS Fig. 16: Using Hartleys base case forecasts Shareprice PEA Actual Hartleys Target 12x EV/EBIT 10x EV/EBIT 8x EV/EBIT 6x EV/EBIT 4x EV/EBIT Source: Hartleys Estimates, IRESS Page 19 of 20

20 HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Head of Research Mike Millikan Resources Analyst Scott Williamson Resources Analyst Simon Andrew Energy Analyst Janine Bell Research Assistant Corporate Finance Grey Egerton- Director & Head of Warburton Corp Fin. Richard Simpson Director Paul Fryer Director Dale Bryan Director Ben Wale Associate Director Ben Crossing Associate Director Stephen Kite Associate Director Scott Weir Associate Director Registered Office Level 6, 141 St Georges TcePostal Address: PerthWA 6000 GPO Box 2777 Australia Perth WA 6001 PH: FX: info@hartleys.com.au Note: personal addresses of company employees are structured in the following manner:firstname_lastname@hartleys.com.au Hartleys Recommendation Categories Buy Accumulate Neutral Reduce / Take profits Sell No Rating Speculative Buy Share price appreciation anticipated. Share price appreciation anticipated but the risk/reward is not as attractive as a Buy. Alternatively, for the share price to rise it may be contingent on the outcome of an uncertain or distant event. Analyst will often indicate a price level at which it may become a Buy. Take no action. Upside & downside risk/reward is evenly balanced. It is anticipated to be unlikely that there will be gains over the investment time horizon but there is a possibility of some price weakness over that period. Significant price depreciation anticipated. No recommendation. Share price could be volatile. While it is anticipated that, on a risk/reward basis, an investment is attractive, there is at least one identifiable risk that has a meaningful possibility of occurring, which, if it did occur, could lead to significant share price reduction. Consequently, the investment is considered high risk. Institutional Sales Carrick Ryan Justin Stewart Simon van den Berg Chris Chong Digby Gilmour Veronika Tkacova Wealth Management Nicola Bond Bradley Booth Adrian Brant Nathan Bray Sven Burrell Simon Casey Tony Chien Tim Cottee David Cross Nicholas Draper John Featherby Ben Fleay James Gatti John Goodlad Andrew Gribble David Hainsworth Neil Inglis Murray Jacob Gavin Lehmann Shane Lehmann Steven Loxley Andrew Macnaughtan Scott Metcalf David Michael Jamie Moullin Chris Munro Michael Munro Ian Parker Charlie Ransom (CEO) Brenton Reynolds Conlie Salvemini David Smyth Greg Soudure Sonya Soudure Dirk Vanderstruyf Jayme Walsh Samuel Williams Disclaimer/Disclosure The author of this publication, Hartleys Limited ABN ( Hartleys ), its Directors and their Associates from time to time may hold shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those securities. Hartleys and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising from any advice mentioned in publications to clients. Hartleys acted as broker to an on-market buyback in the past 12 months for Pacific Energy Limited shares, for which it has earned fees. Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs. Hartleys believes that any information or advice (including any financial product advice) contained in this document is accurate when issued. Hartleys however, does not warrant its accuracy or reliability. Hartleys, its officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. Page 20 of 20