US LNG gas plant: After 30 years, Maurice Brand achieves his dream
It has been 30 years in the making, and he has been close before.
But the 69-year-old West Australian entrepreneur Maurice Brand could now be on the cusp of pulling off something big — starting work on a US-based liquefied natural gas plant that will bring in $US1 billion of cash a year.
Last month, he signed a long-term binding LNG contract — the first anyone has signed in the US market for seven months — for the $US3.5bn Magnolia project that his company, Liquefied Natural Gas Limited, has planned for Lake Charles, Louisiana.
The feat puts LNG Limited — the best-performing ASX stock last year with a 650 per cent gain — on track for financial close early next year (if it clears more hurdles), ready to build a plant that will earn $US1bn a year using the company’s patented technology to turn US gas into LNG.
But since the contract was signed, shares in LNG Limited have slumped 28 per cent, as investors have started to question whether the timeline for getting more agreements is slipping.
“We’re not there yet, but we’re well on the path after last month’s announcement,” Brand, who recently relocated to Houston to drive the project harder, tells The Australian during a recent visit to Perth.
“I’m disappointed in the reaction but we will rebuild momentum as we meet some more milestones.” He says the negative reaction is a combination of misunderstanding of the timeline, markets running ahead of announcements and an energy sector that has lost its lustre.
LNG Limited’s technology was set to get an airing in Australia five years ago when it inked a deal with coal-seam gas company Arrow Energy to build a plant at Gladstone. That deal was scotched when oil majors Royal Dutch Shell and PetroChina bought Arrow and decided they would commit the reserves to a bigger project that would move the dial for them (but has since been abandoned).
“Shell and PetroChina stopped us in our tracks,” Brand says.
“So our attention went to the US where we thought our business model might have a better chance of success.”
An abundant gas supply unable to be ripped away and a huge pipeline network were the main appeal of the US for a company planning to make its money converting other people’s gas into LNG.
Since the Arrow deal fell over, LNG Limited’s market value (even with the recent fall) has soared from about $100m to $1.4bn, after peaking in May at $2.2bn. The growth has come as Brand and his team secured a US site with gas pipeline access and an existing LNG shipping channel, got some serious financial backers and progressed through the US approvals process.
Brand says it is the ability of his OSMR technology to build LNG plants that take up about one-third the land of those the majors build that let an unknown company from Perth put its foot on such a sweet site.
“Bigger parties may have looked at in the past and said it was just too small,” he says.
“Our whole business case is a small footprint that makes it absolutely efficient.”
The story of how a 69-year-old grandfather of seven who abandoned commerce and economics studies at the University of WA came to be heading what his backers believe will be one of the next LNG plants to be approved in the US has its genesis in the start-up of the nation’s first major LNG plant — the North West Shelf.
At the time, Brand was running his own show in the travel industry after 10 years in management with the Australian Postal Institute. He thought he saw an opportunity.
“There was a lot of talk about LNG and I saw a niche in the smaller end of the market: remote power, LNG for trucks buses and trains,” he says.
So in 1985, he formed a company called Energy Equity Corp, which was given a contract to build a small-scale LNG plant at Alice Springs. EEC, which is now known as Energy World Corp, then got involved in power stations, building a gas-fired power station at Barcaldine in Queensland.
After leaving EEC in 2001, when an Indonesian project did not go as well as planned, Brand formed LNG Limited, which he listed in 2004 as managing director. He brought mechanical engineer Paul Bridgwood, the project leader of EEC’s major projects, with him.
“Paul (now LNG’s chief technical officer) came up with the idea of OMSR (optimised single mixed refrigerant) technology after we married the experience we gained in power and LNG at EEC,” Brand says.
Magnolia is being designed to manufacture eight million tonnes of LNG a year through four production trains.
On July 23, it signed its first binding agreement, to toll treat 2 million tonnes of LNG a year for 20 years with a Canadian fund called Meridian LNG, which will ship it to Britain.
To get across the line, Magnolia still has some hurdles to cross. It needs to fund three more tolling agreements, conclude negotiations with contractors KBR and SKE & C and finalise bank financing. It is also waiting to receive a final Environmental Impact Statement from the Federal Energy Regulatory Commission in November that will lead to a regulatory go-ahead early next year.
LNG has not announced the terms of the offtake contract, but Brand tells The Australian the contract will generate about $US300m revenue a year, indicating LNG Limited will receive about $US3 per million British thermal units to turn the gas into LNG.
Foster Stockbroking, LNG Limited’s Australian broker of choice for raisings, estimates operating costs at the project are just US50c per million British thermal units.
This means about $US1bn a year of annual cashflow for Magnolia, and it’s how Foster justifies the $7.70 target price it has on LNG Limited.
When LNG Limited listed, Brand had a 16 per cent stake. That has been diluted to about 1 per cent, worth about $13 million at the current share price of $2.87. Last week, illustrating his confidence in the project, he bought 100,000 shares on-market.
The 27 per cent slump in share price since the announcement has come after a mid-year 2015 target for a final investment decision disappeared (but a target for financial close in the first quarter of next year remained) and LNG gave little information about timing on additional off-take agreements.
“The reaction reflects the company’s continued inability to hit deadlines — it again pushed out the finalisation of additional off-take agreements,” said Alembic Global Advisors analyst Robert Norfleet, one of the few analysts that covers the stock.
“Given a challenging, weak oil-price environment, we are not overly concerned about delays, yet management’s credibility, nevertheless, is being called into question. That said, we believe the LNG Limited story remains compelling.”
If Magnolia comes off, Brand has another project lined up in Nova Scotia, known as Bear Head.
There is some market scepticism about LNG’s OSMR technology, but backers, including US infrastructure fund Stonepeak, who will take on 50 per cent of the project by investing $US660m, say it is fairly simple.
Edison Investment analyst Will Forbes, who also follows the stock, says the technology is a new combination of existing, proven technologies.
He says each has been shown to work.
“With the low costs that OSMR promises, we are optimistic both projects (Magnolia and Bear Head) will succeed, realising value over time,” Forbes said in a recent report that said the share price could pass more than $9 by 2019.
Brand is unlikely to be heading the company by then.
He says he has two years left on his contract and that when that is up, he plans to spend more time with his family in Dawesville, south of Perth — a long way from Louisiana.
