Why gas producer LNG is a class act

Why gas producer LNG is a class act

As gas producer LNG resumes trading today after raising $174 million in capital at $4.35 per share, it is worth bearing in mind the placement was heavily oversubscribed and was executed at a mere 5.4 per cent discount to the company’s one-week volume weighted average price of approximately $4.60.

Consequently, despite a sharp overnight fall in crude prices don’t be surprised if the group trades broadly in line with the placement price.

The funds will be used to progress the company’s flagship Magnolia LNG project located in Louisiana which is expected to deliver first gas in 2018, as well as fast tracking the Nova Scotia based Bear Head project.

Notwithstanding short-term volatility, from a longer term perspective LNG shapes up as a class act. The group’s world-class proprietary technology has revolutionised the liquefied natural gas production industry and in the eyes of Martin Carolan from Foster Stockbroking its share price doesn’t reflect its prominent position.

He has a share price target of $7.70 on the stock and when one considers management’s achievements to date, sizes up pending developments, and runs the numbers this may also be conservative. In fact if it came to a takeover situation incorporating premiums for the intellectual property and full control it could be argued a suitor would have to pay significantly more.

Though it is smaller than some of its blue-chip peers with a market capitalisation of about $2.2 billion, it can build best in class LNG plants at a fraction of the cost of the likes of Gorgon and Wheatstone.

One of the keys to LNG’s success has been the company’s proprietary Optimised Single Mixed Refrigerant (OSMR) and modular construction method which reduces capital expenditure and operating costs. At the start of May, LNG was granted a patent in the US for its OSMR process technology, and it also has patent protection in Canada.


Aside from its smart technology, management has demonstrated a sound knowledge of the energy industry by securing prime sites that offer optimum access to a range of revenue streams, as well as providing operational efficiencies.

Smart Investor was granted an exclusive interview with Houston-based managing director Maurice Brand just prior to LNG recommencing trading on Wednesday morning.

Asked to comment on factors he considered important to the company’s success to date, as well as its future performance he said, ‘While our proprietary technology is at the forefront of being more cost-effective than our peers, we have strategically located plants in close proximity to major transport infrastructure and energy supply sources, leaving us well positioned to target a diversified range of industries in order to insulate LNG from cyclical trends, as well as providing the option to tap into export markets’.

Brand identified key deliverables by June/July were the execution of tolling agreements, one with Meridian and the other confidential at this stage. He said finalising the capital cost will be another important factor, and as the company continues to hit its milestones, as it has done historically, support from investors in the US and Australia should strengthen even further.

Brand is conscious of the need to continue to drive down capital expenditure costs, something that he believes has been a point of difference with LNG as opposed to the big multinational players who have long had the mindset that building big buck projects was a ‘badge of honour’.

Martin Carolan from Foster Stockbroking compared the economics of the group’s Louisiana-based flagship project, Magnolia with 30 other projects under construction and development, highlighting it is poised to become the leader in the lowest cost quartile on a US dollar per tonnes installed capacity basis.

While this is pending the Final Investment Decision (FID) with contractor Kellogg, Brown and Root LLC, Carolan’s projected cost per tonne of less than US$600 is that far below the benchmark average of approximately US$1100 per tonne that any likely variation in upfront capital expenditure is merely academic in terms of comparatively weighing up the economic metrics.


LNG has emerged as something of an enigma in the midst of a sector in damage control where sharp earnings downgrades have occurred, share prices have been battered and even the balance sheets of some of the majors have been brought into question.

Looking at the broader S&P/ASX 200 energy index, it has plummeted 4000 points since September 2014, representing a fall of more than 25 per cent. Unlike LNG, raising capital is hardly an option for S&P/ASX 100 constituents, Woodside Petroleum, Oil Search and Santos. Over the last 12 months their share prices have fallen by approximately 16 per cent, 20 per cent and 42 per cent respectively.

By comparison, the share price performance of LNG (+420 per cent) and its ability to raise substantial capital at close to par is not only an endorsement of its investment merits, but a pointer as to what shareholders can expect in the future.


Don’t be surprised if LNG is included in the S&P/ASX 100 in the near term given its market capitalisation following the capital raising exceeds some other energy companies in the index. Brand also highlighted the company was the best performing stock in the S&P/ASX 200 in 2014, suggesting it wouldn’t be out of place in the ASX 100.

Examining the current make-up of the top 100, of particular note is Beach Energy which has a market capitalisation of approximately $1.4 billion. This compares with LNG’s post capital raising fully diluted market capitalisation of $2.2 billion. The recent placement will improve liquidity, adding further weight to the possibility of inclusion.

Following the capital raising LNG will have cash of approximately $202 million. The first stage of the project which incorporates trains one and two of the four train project is expected to require total capital expenditure of $2.3 billion.

To assist in financing this stage of construction an Equity Commitment Agreement in relation to the provision of a US$660 million provision has been negotiated with New York based Stonepeak Partners, a group predominantly managed by ex-Macquarie senior personnel.

In conjunction with this agreement BNP Paribas will be involved in providing US$1.54 billion in project debt financing. Based on these metrics Stonepeak would own a stake of approximately 50 per cent in return for contributing US$660 million.

The agreement also includes the payment of a one-off success fee on achieving financial close, and it has been indicated the group will go on to provide further debt financing for trains three and four.


As well as Bear Head, LNG is also looking to develop a low-cost project at Fisherman’s Landing, well positioned near Gladstone, Queensland in terms of tapping into a substantial increase in demand for gas on the east coast.

As milestones are met in relation to these projects there is the potential for further share price upside, however a significant catalyst could be the group’s entry into the Mexican market which until recently had predominantly been closed to foreign investment.

Crude oil production in that region has fallen from 3.4 million barrels a day a decade ago to 2.5 million barrels while demand has increased markedly. However, the country’s proven natural gas reserves stand at 17 trillion cubic feet, a figure that would be very enticing to global financiers, energy producers and indeed LNG itself.

The US Energy Information Administration (EIA) recently predicted US natural gas exports to Mexico would be in the order of nearly 4 billion cubic feet per day by 2018.




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