The following quotes from Foster Stockbroking today's report are well summarized the fundamentals:
----------------------------------------------------- The Liquefied Natural Gas Ltd (LNG.ASX; $0.28/sh; Mkt Cap $85m) – Additional capacity and non-FTA licence lodged, re-rating milestones imminent - BUY, PT $0.70/sh
Today’s Top Pick.
Liquefied Natural Gas Ltd (LNG.ASX; $0.28/sh; Mkt Cap $85m) – Additional capacity and non-fta licence lodged, re-rating milestones imminent - BUY, PT $0.70/sh •Yesterday LNG announced it applied to the United States Department of Energy (‘DOE’) to increase its export capacity to FTA countries by an additional 4mtpa to 8mtpa and contemporaneously applied for an 8mtpa export license to non-FTA countries. The Magnolia project is currently approved for 4mtpa export to FTA countries only and the company has heads of agreement signed with two off take partners – Gunvor and Gas Natural – for 4mtpa over 20 years. •We note the application to export to non-FTA countries is not additional capacity, ie the total capacity being requested is 8mtpa. Management’s commentary in yesterday’s announcement was encouraging stating “discussions being held with potential new tolling parties have increased LNG demand from Magnolia LNG to over 8mpta”. Consequently, we anticipate further MoU’s will be signed with off-take partners in the near term to underwrite trains 3 and 4. •While the project provides significant upside under a 4mtpa ‘base case’ scenario, upsizing to 8mtpa makes the return profile even more compelling Under an 8Mtpa case we estimate an annual project EBITDA of ~$750m leading to an increase in LNG’s NPV10 to A$772m ($2.90/sh) vs. A$560m ($1.83/sh) for a 4Mtpa operation. We estimate incremental capex of US$1,300m for the engineering and construction of trains 3 and 4, making the return profile for the project more attractive given the sunk cost for the site infrastructure. Based on our conceptual model we forecast incremental equity of U$100m will be required to finance the additional 2 trains which could be funded out of cash flow from trains 1 and 2 on a pro-rata equity basis. •The next key milestone is the signing a definitive agreement with Stonepeak which should be finalised by 23 October. It’s important to re-iterate that the funding alliance with Stonepeak provides 100% of the equity required at financial close estimated at US$660m (total capex US$2.26B). Stonepeak to receive ~50% project equity based on benchmark IRR criteria with LNG retaining a free carried interest of ~50%. LNG will also receive a 3% success fee by way of a cash payment, which equates to US$66m. Financial close is targeted for early 2015. ?Multiple re-rating catalysts still to come in 2013/14: Investors are provided with multiple re-rating catalysts through the balance of 2013 and early 2014 including:
1.Definitive equity funding agreement (2QFY14); 2.Bankable off-take agreements for train 1 (2QFY14) & train 2 (3QFY14); 3.FERC environmental filing (2QFY14); 4.Confirmation of EPC contractor (2QFY14); and 5.Potential for HoAs for trains 3 & 4 ongoing. •Assuming the company remains free carried for 50% project equity we ascribe LNG an un-risked equity valuation of $560m or $1.83/sh providing incoming investors with a highly leveraged risk/return profile vs the current share price of $0.28/sh. Please refer to our recent initiation note attached. We reiterate our BUY recommendation and a PT of $0.70/share.
Upcoming Marketing
Liquefied Natural Gas (LNG.ASX) - Maurice Brand (MD) •Singapore: 17-18 October 2013 •Melbourne: 28 October 2013 •Sydney: 29-30 October 2013
