Liquefied Natural Gas
Written by
Liquefied Natural Gas |
Good start to the year |
Update |
Oil & gas |
31 January 2017 |
ADR research
ADR share price performance
Business description
Next events
Analyst
Liquefied Natural Gas is a research client of Edison Investment Research Limited |
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Liquefied Natural Gas (LNGL) has already announced two encouraging updates in 2017. On 30 January, the EPC contract with KSJV was extended to the end of June 2017, giving greater construction price certainty as and when the final investment decision (FID) is taken. On 23 January, it announced a Heads of Agreement (HOA) with KG LNG terminal in India for 4mtpa for 20 years. While non-binding, this suggests the company is making progress towards financial close for Magnolia’s 8mtpa export project. As it works to retain as much cash as possible until the FID is reached, LNG is making good progress towards monetizing the OSMR technology and Magnolia project. We leave our valuation unchanged, but note that if a binding contract is agreed with KG LNG it would be a major step towards realizing the significant potential of the Magnolia project. Bear Head (with all environmental approvals obtained) remains a further option on the growing LNG trade in years to come.
Year end |
Revenue |
PTP* |
Operating cash flow (US$m) |
Net debt/ |
Capex |
06/15 |
0.0 |
(65.1) |
(52.8) |
35.4 |
(8.8) |
06/16 |
0.0 |
(86.9) |
(88.4) |
50.7 |
(0.1) |
06/17e |
0.0 |
(31.8) |
(24.0) |
26.7 |
0.0 |
06/18e |
77.8 |
45.9 |
53.6 |
68.8 |
(11.5) |
Note: Converted at A$1.33/US$1. *PTP is normalized, excluding amortization of acquired intangibles, exceptional items and share-based payments.
Non-binding HOA with KG LNG terminal
The non-binding nature of the HOA means further work has to be executed before a binding agreement can be signed; this would likely have a material de-risking effect on Magnolia as it would mean half of the 8mtpa capacity would be accounted for. However, we are encouraged that progress has been made and long-term customers are interested in taking Magnolia-sourced LNG.
Magnolia in a strong position if offtake signed
Magnolia has all regulatory approvals required, as well as the non-FTA permit, allowing the project to export LNG anywhere in the world. This means that if binding agreements are signed, the company and its equity partner Stonepeak (subject to current negotiations on increasing the amount if required) can move to a financing solution with adviser BNP.
Valuation: Remains US$3.8/ADR (A$1.3/share)
We leave our valuation unchanged, save for reflecting the year-end shares in issue and the evolving FX rates, neither of which have a material effect. The key components for investors will be the de-risking events of a binding offtake, a financing solution with BNP being reached and a FID. After this, the construction of the project can start, taking the company towards first LNG, which we model in 2022, at the time when the current LNG surplus is forecast to have rebalanced.
KGL LNG terminal summary
KGL is an ambitious Indian project to supply gas to the Andhra Pradesh-Orissa industrial region where VGS (the Indo-American company running the project) estimates there is close to 7,000MW of near-idled power capacity. According to VGS, the initial plans call for up to 4.47mtpa of LNG to be stored and regasified off the coast and piped to the industrial area. A second phase, dependent on market demand, could see an increase to over 8mtpa. We would not expect LNGL to provide this extra gas if the project expands as it would represent significant concentration and third-party risk; however, the area’s possible demand is encouraging.
The project is a joint venture between VGS Group, Cavallo Energy and Exmar. Cavallo Energy is backed by Calpine, the largest generator of electricity from natural gas and geothermal sources in the US. It has a c $4bn market cap and is listed on the NYSE. Exmar is a c €440m market cap, Belgium-based shipping group.
We are encouraged by the announcement of the non-binding HOA, and note that a binding agreement would move the Magnolia project directly towards a bankable solution then financial close (it has no further regulatory steps to fulfil). It is also worth noting that (while we do not change any assumption in our model), the credit rating of the offtakers may have an effect on the amount of debt that can be raised against the project, which may affect the equity required for Magnolia to be built. If more equity is required from LNGL, this may reduce the overall value for shareholders (in absolute and/or per share terms).
Valuation
We leave our valuation and model unchanged, only updating the FX rates and the shares in issue as of 31 December. This has a minimal effect.
Exhibit 1: NAV summary
Asset |
|
Equity interest |
|
Net risked value |
||
Country |
CoS |
|
|
|
||
|
% |
% |
US$m |
A$/share |
US$/ADR |
|
Net (debt)/cash (June 2016) |
51 |
0.13 |
0.40 |
|||
G&A (includes share based payments) |
(55) |
(0.14) |
(0.43) |
|||
Project development costs Jun 2016 - July 2017 |
(15) |
(0.04) |
(0.12) |
|||
Magnolia Trains 1&2 |
United States |
35% |
60% |
218 |
0.57 |
1.71 |
Magnolia Trains 3&4 |
United States |
35% |
60% |
166 |
0.43 |
1.29 |
Bear Head Trains 1&2 |
Canada |
60% |
20% |
68 |
0.18 |
0.53 |
Bear Head Trains 3&4 |
Canada |
60% |
20% |
68 |
0.18 |
0.53 |
Bear Head Trains 5&6 |
Canada |
60% |
0% |
0 |
0.00 |
0.00 |
Risked NPV of cost of raising equity Bear Head (assumed NAV/share dilutive effect 30%) |
20% |
(16) |
(0.04) |
(0.13) |
||
Fisherman's Landing |
Australia |
100% |
0% |
0 |
0.00 |
0.00 |
NAV |
|
|
0% |
485 |
1.26 |
3.79 |
Source: Edison Investment Research
Financials
The company held A$59.9m (US$45.2m) in cash in December, down from A$67m to (US$51m) in June 2016. As we have indicated before, the company has enough cash to continue to progress the Magnolia (and Bear Head) projects towards financial close, but needs to partner with others to fund the construction of the projects. For Magnolia, this could (subject to ongoing negotiations) come from Stonepeak Infrastructure Partners, while a partner for Bear Head is not yet known.
Exhibit 2: Financial summary
|
|
US$000s |
2014 |
2015 |
2016e |
2017e |
2018e |
June |
|
|
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
PROFIT & LOSS |
|||||||
Revenue |
|
|
0 |
0 |
0 |
0 |
78 |
Cost of Sales |
0 |
1 |
0 |
0 |
0 |
||
Gross Profit |
0 |
1 |
0 |
0 |
78 |
||
EBITDA |
|
|
(18) |
(65) |
(87) |
(32) |
46 |
Operating Profit (before amort. and except.) |
(18) |
(66) |
(87) |
(32) |
46 |
||
Intangible Amortization |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
0 |
||
Operating Profit |
(18) |
(66) |
(87) |
(32) |
46 |
||
Net Interest |
(1) |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
(19) |
(65) |
(87) |
(32) |
46 |
||
Profit Before Tax (FRS 3) |
(19) |
(65) |
(87) |
(32) |
46 |
||
Tax |
0 |
(0) |
0 |
0 |
0 |
||
Profit After Tax (norm) |
(19) |
(65) |
(87) |
(32) |
46 |
||
Profit After Tax (FRS 3) |
(19) |
(65) |
(87) |
(32) |
46 |
||
Average Number of ADRs |
115.5 |
125.8 |
126.0 |
128.0 |
128.0 |
||
EPS - normalized |
|
(0.0) |
(0.0) |
(0.0) |
(0.0) |
0.0 |
|
EPS - normalized and fully diluted |
(0.0) |
(0.0) |
(0.0) |
(0.0) |
0.0 |
||
EPS - (IFRS) |
|
(0.0) |
(0.0) |
(0.0) |
(0.0) |
0.0 |
|
Dividend per share |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Gross Margin (%) |
N/A |
N/A |
N/A |
N/A |
N/A |
||
EBITDA Margin (%) |
N/A |
N/A |
N/A |
N/A |
N/A |
||
Operating Margin (before GW and except.) (%) |
N/A |
N/A |
N/A |
N/A |
N/A |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
0 |
9 |
9 |
9 |
20 |
|
Intangible Assets |
0 |
0 |
0 |
0 |
1 |
||
Tangible Assets |
0 |
9 |
9 |
9 |
20 |
||
Investments |
0 |
0 |
0 |
0 |
0 |
||
Current Assets |
|
39 |
139 |
55 |
31 |
84 |
|
Stocks |
0 |
0 |
0 |
0 |
0 |
||
Debtors |
0 |
2 |
1 |
1 |
1 |
||
Cash |
36 |
35 |
51 |
27 |
80 |
||
Other |
3 |
102 |
3 |
3 |
3 |
||
Current Liabilities |
|
(3) |
(11) |
(3) |
(3) |
(3) |
|
Creditors |
(3) |
(11) |
(3) |
(3) |
(3) |
||
Short term borrowings |
(0) |
(0) |
(0) |
(0) |
(0) |
||
Long Term Liabilities |
|
(0) |
(0) |
(0) |
(0) |
(0) |
|
Long term borrowings |
(0) |
(0) |
(0) |
(0) |
0 |
||
Other long term liabilities |
(0) |
(0) |
(0) |
(0) |
(0) |
||
Net Assets |
|
|
36 |
137 |
61 |
37 |
102 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
(16) |
(53) |
(88) |
(24) |
54 |
|
Net Interest |
(0) |
(0) |
(0) |
(0) |
(0) |
||
Tax |
0 |
0 |
0 |
0 |
0 |
||
Capex |
(0) |
(9) |
(0) |
0 |
(11) |
||
Acquisitions/disposals |
0 |
0 |
0 |
0 |
0 |
||
Financing |
53 |
155 |
0 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
0 |
||
Other |
|||||||
Net Cash Flow |
35 |
(1) |
15 |
(24) |
42 |
||
Opening net debt/(cash) |
(1) |
(36) |
(35) |
(51) |
(27) |
||
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
||
Other |
(0) |
0 |
(0) |
0 |
0 |
||
Closing net debt/(cash) |
(36) |
(35) |
(51) |
(27) |
(69) |
||
Source: Company accounts, Edison Investment Research
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