A Considered View

Background

I am a new contributor to EWC postings but have followed the company for a number of years. My interest was first sparked by the company strategy - which was to become an integrated clean energy player in the gas and power business in Asia. In addition I was comforted that this business was largely owned managed by people who have a history of successful power development in this region.

Over the years I have observed that the background to the LNG/gas generation business has substantially moved in EWC’s favour with the latest accord in Paris constraining future development of coal fired power around the world and in particular this region. Gas generation is likely to be the biggest beneficiary of this move.

It has been intriguing to watch EWC move from being; in favour a few years ago to; completely out of favour now, despite evidence that the company has come a long way with its projects during this time together with the backdrop for gas generation improving markedly.

The deterioration in view started with a journalist from the Sydney Morning Herald writing articles that were highly likely based on research from a fund manager who was building a short position in the company and needed a lower share price to make money. His letter suggested that money raised by EWC was not being spent on the projects. Now that EWC has almost completed these projects an apology from the fund manager to the company would be appropriate, followed by one from the journalist.

Over time, the short position has continued to be managed and with it the EWC share price. In fact there is almost a negative 2/3 correlation between changes in the short position and changes in the share price. In simple terms this means the behaviour of the shorters is heavily influencing the share price. The short is currently sitting at approximately 52 mill shares. Recently, particularly from June 2015, the share price has been shorted as if EWC were an oil/gas exposure. But falling oil/gas prices improve the economics of the power generation part of EWC, particularly in the Philippines – i.e. the EWC share price should not necessarily have fallen (with the fall in the value of the gas assets being more than offset by a rise in the value of the generation assets).

Declaration of interest

I have been a shareholder in EWC for some time and have recently just increased my holding in the low 20’s for a number of reasons including; the projects are close to coming on line, the book value of the projects is considerably higher than the share price, the replacement value of the projects is likely to be significantly higher than the book value and the shorts have been increasing for reasons likely to be related to the fall in oil/gas price, which as discussed improves the economics of gas generation rather than reducing it.

Further discussion

I have developed views on the relevance of strategy, strategic significance of assets, governance, related party transactions, timing of projects, funding and the economics of the business units. If readers would like to engage on discussions on these topics I am happy to share my views.