Liquefied Natural Gas — Update 31 January 2017

Liquefied Natural Gas — Update 31 January 2017

Liquefied Natural Gas

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Liquefied Natural Gas

Good start to the year

Update

Oil & gas

31 January 2017

ADR research

Price

US$2.69

Market cap

US$344m

ADR/Ord conversion ratio 4

Net cash at end December 2016

A$59.9m /US$45.2m

ADRs in issue

128m

ADR Code

LNGLY US

ADR exchange

OTC

Underlying exchange

ASX

Depository

Deustche

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

2017

Analyst

Will Forbes

+44 (0)20 3077 5749

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

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
(US$m)

PTP*
(US$m)

Operating cash flow (US$m)

Net debt/
(cash) (US$m)

Capex
(US$m)

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

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Liquefied Natural Gas and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

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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

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Liquefied Natural Gas and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, 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

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Liquefied Natural Gas — Update 31 January 2017

Liquefied Natural Gas

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