Liquefied Natural Gas Ltd

Marketing mode

Company update

Oil & gas

6 April 2017

ADR research

Price	US$2.03
Market cap	US$260m
ADR/Ord conversion ratio 4
Net cash (US$m) at 31 December 2016		45.7

ADRs in issue	128m
ADR code	LNGLY US

ADR exchange	OTC
Underlying exchange	ASX
Depository	Deutsche

ADR share price performance

52-week high/low

US$3.4

US$1.4

Business description

Liquefied Natural Gas is an ASX-listed company devoted to the development of LNG export terminals in the US, Canada and other potential locations. It has traded ADRs.

Next events

Binding offtake agreements signed	2017
Final Investment Decision (FID)	2017

Analyst

Will Forbes

+44 (0)20 3077 5749

oilandgas@edisongroup.com

Edison profile page

Liquefied Natural Gas Ltd is a research client of Edison Investment Research Limited

Liquefied Natural Gas Ltd (LNGL) has made progress in the last six months towards Final Investment Decision (FID). Signing binding tolling agreements is key and encouragingly, the company is in discussion with potential partners for over three times the 8mtpa capacity. Importantly, the project retains its (non-binding) offtake agreement with Meridian and a heads of agreement with Vessel Gasification Solutions (VGS). Technically, the project is in good shape, with certainty over costs (until June 2017) and non-FTA approval received, while discussions with Stonepeak over extension of equity funding are advancing and debt funding capacity should be available. We have tweaked our DCF-based valuation for actual cash levels and FX rates, resulting in a broadly unchanged value of US$3.84/ADR (or A$1.26/share).

Year end	Revenue (US$m)	Reported PTP (US$m)	Cash from operations (US$m)	Net (debt)/ cash (US$m)	Capex (US$m)
06/15	6.1	(65.8)	(53.4)	35.8	(8.9)
06/16	5.6	(87.9)	(89.4)	51.3	(0.1)
06/17e	1.6	(24.4)	(18.1)	18.7	(0.3)
06/18e	78.6	46.3	54.1	61.2	(11.5)

Note: We include the spending for Magnolia and Bear Head on an unrisked basis. Converted at A$1.3/US$. Dividend yield excludes withholding tax. Investors should consult their tax advisor regarding the application of any domestic and foreign tax laws.

Magnolia at an advantage versus peers

Magnolia has received approval for non-FTA export volumes. It has the lowest-cost technology solution of any of its development peers and has known and fixed construction costs (as well as production guarantee levels). It is therefore well placed to attract investment and help fulfil the LNG supply/demand gap that is forecast to appear in the early 2020s, once the current oversupply has burned off.

Moving towards offtake agreements

The company is focused on getting the binding offtake agreements to fuel a final investment decision. Signs are promising: the company is in discussions with agreements with potential partners totaling over three times the project capacity, while agreements with Meridian and VGS that could be converted to a binding status would be significant steps towards a fully contracted project. Agreements would trigger more definite discussions over debt capacity with BNP, getting the project to FID.

Valuation: Broadly unchanged at US$3.84/ADR

Our valuation is broadly unchanged at US$3.84/ADR (or A$1.26/share), after accounting for actual cash levels in December 2016 (of A$59.9m/US$45.7m). The company should be well funded to pursue its aggressive marketing strategy to get to FID, given that cash burn has been reduced. We note that our valuation has material room to grow as and when the Magnolia project receives binding offtake agreements and reaches FID (we currently risk the project at 60%), while we attribute limited value to Bear Head’s contribution currently, despite its larger potential size and advanced permitting.

Magnolia marketing push

The company is making a concerted effort to communicate Magnolia’s strengths, comparing it to other developments in South Texas, Louisiana and on the West Coast. LNGL’s contention is that the project has structural advantages in its use of technology and location, which give it the edge over peers. It is described as shovel ready and can be progressed once binding offtake agreements are reached and debt is sourced.

Location and site

Magnolia’s site (115 acres) at Lake Charles is small by comparison to others, but is close to existing gas pipeline infrastructure and other major industrial sites, allowing access to utilities and services (like power, emergency and safety chemicals). As a result, non-direct liquefaction costs (like power, gas, dredging and pipelines) are well below peers, according to the company. Additionally, other projects are not as well progressed, meaning that costs for many of these services are not fully known.

Exhibit 1: All-in cost components of liquefaction projects

Source: LNGL

Exhibit 2: The resulting implied costs per ton of product are markedly lower at Magnolia

Source: LNGL

Costs and timing

OSMR is seen by the company as a lower-cost modular approach to liquefaction, which is more widely applicable to forthcoming energy needs than historic (and larger-scale) techniques. Lower capex and opex costs with associated greater energy efficiency should mean it is well placed to attract partners – Magnolia is the lowest-cost project of those studied by the company (on a US$/ton basis). Of the projects seeking FERC and DoE approvals, only two (including Magnolia) have non-FTA approval. If Magnolia’s time for approval is representative, many have more than two years until this is achieved, which means it should be near the top of projects that can be constructed before the 20mtpa limit set by the DoE on LNG exports is reached (around 17mtpa has already been contracted).

The company indicated that a FERC Notice to Proceed will likely be staged, with modular notices issued as and when the engineering components/designs are finalized. The company expects the initial Partial Notice to Proceed (for site preparation) in the near future, as it is addressing questions from FERC as a priority. Partners and funding

On the update webcast, the management disclosed that it is in discussions with potential offtakers for contracts which total more than three times the 8mtpa capacity of Magnolia. Concerns on the webcast about the duration of potential contracts (we assume 20 years), reopeners and possible risk sharing on pricing (with regard to linking to European pricing or NBP) were acknowledged but management seemed comfortable that although it remains flexible on getting the project across the line, it does not believe that fundamental changes to these assumptions are probable.

The original agreement with Stonepeak foresaw funding the project to 4mtpa. Management is looking to increase this to cover the larger capacity and believes that an announcement may come in the second (calendar) quarter 2017. Significant de-risking of the project has occurred since the initial agreement, but this has been offset by cost increases and a changing LNG pricing environment.

On debt capacity, the management is looking at a 70:30 (or 75:25) debt to equity ratio, in line with our current modelling of 70% debt funding. Production from other projects (notably Cheniere) and the movement of these projects from project funding to corporate debt or bonds suggest (according to the CFO) that there may be capital freed up, which banks may look to be recycled into Magnolia.

Valuation

We leave our project modelling unchanged from previous notes, but adjust for actual cash and equivalents as of December, leaving a risked DCF-based NAV of A$/share (US$/ADR). Our valuation is also slightly affected by the small movement in the A$/US$ FX rate since our last update. This results in a broadly unchanged valuation of US$3.84/ADR (or A$1.26/share). We would expect this to move meaningfully if and when binding offtake agreements are signed and the project moves towards FID. In that case, investors (and we) can start to move away from a risked DCF approach towards one that also takes into account earnings and cash flow multiples when production starts up. We would expect this to represent material upside from current levels (given our current assumptions).

Our major assumptions (for Magnolia) are given below:

■

FID in July 2017, with a 56-month construction period. Start-up in H222 (this is a potential risk, as FID may be optimistic).

■

Tolling fee of US$2.5/mcf (with some going as a success fee to the contractor), leaving LNGL with US2.43/mcf.

■

Debt funding of 70%, with an interest rate of 7.5%. Stonepeak to provide the required equity funding.

■

We discount the levered cash flows at 10% and risk the project as shown below.

Exhibit 3: Valuation summary

Asset	Country	Equity interest	CoS	Net risked value
Asset		%	%	US$m	A$/share	US$/ADR
Net (debt)/cash (Dec 2016)				46	0.12	0.36
G&A (includes share based payments)				(55)	(0.14)	(0.43)
Project development costs Jan - July 2017				(4)	(0.01)	(0.03)
Magnolia Trains 1&2	United States	35%	60%	218	0.56	1.71
Magnolia Trains 3&4	United States	35%	60%	166	0.42	1.29
Bear Head Trains 1&2	Canada	60%	20%	68	0.17	0.53
Bear Head Trains 3&4	Canada	60%	20%	68	0.17	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				4,891	1.26	3.84

Source: Edison Investment Research

Half year results summary

LNGL incurred losses in the half year ending December 2016 of A$13.6m, although this is not particularly relevant for investors in the company. This was primarily the result of project development costs of A$7.0m (down from A$68.4m the year before) and general and administrative expenses of A$6.2m. This produced cash flow from operations of minus A$13.6m, while the company invested A$20.6m (mostly in financial assets). This left company cash levels reduced from A$67.2m to A$35m. This does not include security deposits and investments in term deposits of A$25.2m. Including these amounts, short-term liquidity would total A$59.9m (US$45.7m).

Operations progress in period

■

The company has continued to press the Magnolia project’s case to the LNG trading and investor communities, with sole focus on marketing the Magnolia LNG’s offtake.

■

On 23 January, Magnolia LNG announced a non-binding heads of agreement with VGS for sales to an LNG important terminal in India. The agreement provides for 20-year Free-on-Board (FOB) sales of up to 4mtpa, conditional on a number of factors. We note that this would represent half of Magnolia’s 8mtpa capacity.

■

The project lump-sum turnkey agreement with KSJV has been extended and is now valid until 30 June 2017.

■

The agreement with Meridian LNG has been further extended to 30 November 2017.

■

The Magnolia project was approved to export products to non-FTA countries.

Management changes in period

Richard Beresford stepped down as chairman (but remains as a non-executive director) and is succeeded by Paul Cavicchi, a veteran of over 25 years in gas and power projects (including LNG infrastructure). He formally worked as executive VP of GDF Suez Energy North America, so should be well placed to take the company forward alongside CEO Greg Vesey.

Additionally, the company has executed a cost reduction program to minimize cash outflows while the Magnolia project moves towards FID.

Financials

The company saw cash burn in the last six months of A$7.3m (if we include investments as relatively liquid), so it is well funded to continue to push Magnolia’s merits for the foreseeable future, given its cash (and equivalents) balance of A$59.9m/US$45.7m.

It does not have enough to fund development of Magnolia, but has a number of agreements in place to fund certain levels of equity (with Stonepeak) and to seek required debt funding (with lead arranger BNP). We caution that we assume the equity required to develop Magnolia is not fully covered, although we assume that LNGL and Stonepeak are able to come to an arrangement to extend the historical agreement. If this is not successful, LNGL would need to source another external investor, or perhaps suffer material share dilution to raise the required capital (although, in this case, it would likely own a larger percentage of the project).

If and when the project starts up, the resulting cash flows should provide for material profits that can either be recycled into other projects (Bear Head is the most likely) or returned to shareholders. Either way, the implied share price at first production (via EV/EBITDA or P/E multiples) is many times the current share price. For comparison, the EV/EBITDA and P/E implied valuations (for the Magnolia 8mtpa project only) are below. We are not using these in our valuation at the moment.

Exhibit 4: Future possible ADR valuation for LNGL (Magnolia 8mtpa project only), EV/EBITDA (x)	Exhibit 5: Future possible ADR valuation for LNGL (Magnolia 8mtpa project only), P/E (x)

Source: Edison Investment Research	Source: Edison Investment Research

Exhibit 4: Future possible ADR valuation for LNGL (Magnolia 8mtpa project only), EV/EBITDA (x)

Source: Edison Investment Research

Exhibit 5: Future possible ADR valuation for LNGL (Magnolia 8mtpa project only), P/E (x)

Source: Edison Investment Research

Exhibit 6: Financial summary

Accounts: IFRS, Year-end: June, US$m	2014	2015	2016	2017e	2018e
Total revenues	0	6	6	2	79
Cost of sales	0	0	0	0	0
Gross profit	0	6	6	2	79
SG&A (expenses)	(3)	(6)	(15)	(9)	(9)
Other income/(expense)	(15)	(55)	(68)	(9)	(15)
Exceptionals and adjustments	(0)	(11)	(11)	(8)	(8)
Depreciation and amortization	(0)	(0)	(0)	(0)	(0)
Reported EBIT	(18)	(66)	(88)	(25)	46
Finance income/(expense)	(1)	0	0	0	0
Other income/(expense)	0	0	0	0	0
Exceptionals and adjustments	0	0	0	0	0
Reported PTP	(19)	(66)	(88)	(24)	46
Income tax expense (includes exceptionals)	0	(0)	0	(0)	0
Reported net income	(19)	(66)	(88)	(24)	46
Basic average number of ADRs, m	334	464	503	512	512
Basic EPS	0.0	(0.6)	(0.7)	(0.2)	0.4
Balance sheet
Property, plant and equipment	0	9	9	9	20
Goodwill	0	0	0	0	0
Intangible assets	0	0	0	0	1
Other non-current assets	0	0	0	0	0
Total non-current assets	0	9	9	9	21
Cash and equivalents	36	36	51	19	73
Inventories	0	0	0	0	0
Trade and other receivables	0	2	1	1	1
Other current assets	3	103	4	19	19
Total current assets	39	141	55	39	93
Non-current loans and borrowings	0	0	0	0	11
Other non-current liabilities	0	0	0	0	0
Total non-current liabilities	0	0	0	0	12
Trade and other payables	3	11	2	2	2
Current loans and borrowings	0	0	0	0	0
Other current liabilities	0	1	1	0	0
Total current liabilities	3	11	3	2	2
Equity attributable to company	36	139	62	46	100
Non-controlling interest	(0)	(0)	(0)	(0)	(0)
Cash flow statement
Profit for the year	(19)	(66)	(88)	(24)	46
Depreciation and amortization	0	0	0	0	0
Share based payments	0	11	11	8	8
Other adjustments	1	(6)	(5)	(2)	0
Movements in working capital	2	7	(7)	0	0
Cash from operations (CFO)	(17)	(53)	(89)	(18)	54
Capex	(0)	(9)	(0)	(0)	(11)
Acquisitions & disposals net	0	0	0	0	0
Other investing activities	(1)	(101)	100	(15)	0
Cash used in investing activities (CFIA)	(2)	(109)	100	(16)	(11)
Net proceeds from issue of shares	54	156	0	1	0
Movements in debt	0	0	0	0	11
Other financing activities	(0)	(0)	(0)	(0)	0
Cash from financing activities (CFF)	54	156	0	0	11
Increase/(decrease) in cash and equivalents	35	(6)	10	(33)	54
Currency translation differences and other	(0)	6	5	1	0
Cash and equivalents at end of period	36	36	51	19	73
Net (debt) cash	36	36	51	19	61
Movement in net (debt) cash over period	35	(0)	15	(33)	43

Source: Edison Investment Research, company accounts

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Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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