At 71 cents a share, LNG Limited is a long way from the 20 cents at which it traded a year ago – but investors have to try to assess just how much higher the stock can be re-rated as Magnolia LNG progresses through the development timetable.
One of the great economic themes of recent years has been the US shale gas boom, which is bringing in its wake some profound changes. Firstly, lower energy costs in the US has kick-started what could become self-reinforcing recovery in the US. The cheaper power has lured many US manufacturers to shift manufacturing operations back to the US – and bringing back what were thought to be long-lost jobs with them. Foreign manufacturers – especially from Europe – are joining this migration.
The US is poised to become not only self-sufficient in energy terms, but also – in a turnaround that would have been unthinkable just five years ago – become a net energy exporter in the next few years.
It is a massive economic theme, considered a rare positive “black swan” event.
Australian investors have not had many opportunities to invest in this theme, but Liquefied Natural Gas Limited (LNG) is one. LNG Limited is poised to take advantage of the US shale gas boom, by developing its Magnolia project, a four-train LNG export terminal in Lake Charles, Louisiana, that is slated for eight million tonnes a year at full production.
LNG Limited will be best-known to Australian investors as a smaller participant in the Gladstone LNG frenzy in Queensland – it was planning the fifth Gladstone project, a two-train, three million tonnes a year plant, to be developed in conjunction with the formerly ASX-listed CSG supplier Arrow Energy, but when Arrow was taken over by Shell and PetroChina in August 2010, the deal lapsed. LNG Limited still has the rights to develop a small-scale LNG plant at Fisherman’s Landing on Gladstone harbour, and is working with its major shareholder, Chinese firm Huanqui Contracting & Engineering (HQC) looking for alternative gas supply deals, but the main game for the company has moved to the bayous of Louisiana.
That is not to say that Gladstone has been a waste of time – far from it. The technical and engineering knowledge LNG Limited gained during the development and early construction stages of the Gladstone LNG Project helped to get Magnolia off the ground, and cut at least $30 million off the development costs. More important was the fact that Gladstone was the genesis for the company’s patented optimised single mixed refrigerant (OSMR) technology, a highly thermal-efficient process for the liquefaction of LNG that the company says can potentially halve the cost of an LNG plant, both in terms of capital investment and operating costs, with faster construction to boot. Magnolia will use the OSMR technology.
Since announcing the Magnolia LNG export project in early 2013, LNG Limited has worked impressively to fast-track the project, and has achieved a succession of milestones that have galvanised the share price. LNG has been a pedestrian performer over the last five years, but since Magnolia was unveiled, the share price has more than tripled, capitalising LNG Limited at $252 million.
More than 20 US LNG export terminals are going through the regulatory process, but Magnolia has become one of the front-runners. On current schedules, final investment decision (FID) is expected in the December quarter of 2014, with final approval from the US Federal Energy Regulatory Commission (FERC) expected to follow in the first quarter of 2015. That would make first LNG export achievable in early 2018.
The OSMR technology is a new combination of several existing technologies – each of which has been shown to work independently – but there is a substantial element of technology risk with Magnolia. However, LNG Limited has demonstrated an impressive ability to de-risk the project. Spanish natural gas utility Gas Natural, Russian commodity trading group Gunvor, Washington-based global power company AES and LNG Holdings Corp. (owned by a fund managed by Canadian private investment company West Face Capital Inc.) have signed non-binding ‘tolling term sheets.’ Even though these are not formal contracts – LNG Limited is working with each party to progress them to that stage – the tolling term sheets have effectively supported the full development of Magnolia as a four-train project.
The deals are structured such that Magnolia LNG provides liquefaction, storage and ship-loading facilities to LNG buyers, who pay a monthly fixed capacity fee, plus all LNG plant operating and maintenance costs. The LNG buyers are also responsible for the supply and transportation of feedstock gas to the project site.
Also, US infrastructure fund Stonepeak Infrastructure Partners has committed to provide the US$660 million equity portion of the total estimated turnkey construction costs of $2.2 billion for the first four million tonnes a year capacity, in return for a 50% stake in Magnolia LNG. The US$660 million represents 30% of the total capital costs: LNG Limited will finance the remaining 70% with project debt.
The Magnolia site at Lake Charles has significant infrastructure already in place: there has been an LNG import terminal there since 1981, which is connected to the main s hip channel giving access to the Gulf of Mexico. There is a gas feeder pipeline, the interstate Kinder Morgan Louisiana Pipeline (KMLP), with which LNG Limited’s subsidiary Magnolia LNG has executed a legally binding pipeline capacity agreement that secures the gas transportation rights for Magnolia’s full eight million tonnes a year capacity.
Earlier this month LNG Limited placed 90 million shares at 55 cents a share to raise A$49.5 million to fund the Magnolia project. About 80% of the placement was taken up by cornerstone US Institutional Investors. The placement followed formal filing of Magnolia’s FERC application, positioning the project as one of only a handful of the US-based LNG export projects to have completed this milestone. Magnolia LNG is now fully funded through to ‘financial close,’ which is planned for mid-2015.
Investors like the idea of US LNG exports. The Crimea crisis of 2014 has exposed how much European customers would like alternative supply sources to the Russian Gazprom. LNG is a cleaner hydrocarbon fuel than coal. If the US were to open up LNG exports to countries with which it does not have free trade agreements – which the geo-political situation would seem to justify – Magnolia’s economics would improve significantly.
At 71 cents a share, LNG Limited is a long way from the 20 cents at which it traded a year ago – but investors have to try to assess just how much higher the stock can be re-rated as Magnolia LNG progresses through the development timetable. This is difficult to estimate – but LNG Limited’s potential is much higher than 71 cents.
