I have spent some more time digging into facts – past and present – which I feel the Company's officers should be held to account on. And before long termers on these forums, whom I fully respect, yet who feel these domains are solely for glass half full / she will be right comments bash me down, I challenge them to consider the below in its entirety. To those that think I am having a go at management for things that are out of their control, I am not. This is about frank and prompt disclosure of facts, managing the market’s expectations appropriately, and ensuring you have the right approach regarding risk and preservation of shareholder value.
Frank disclosure of facts
To much fanfare, 4 Heads of Agreements were signed in 2013 & 2014.
1. Westface
Current status: BTA signed Jul-15.
2. Gunvor (2mpta). Signed July-13. As per LNG announcement: Gunvor has signed a Heads of Agreement with LNG Group Panama as the aggregator and supplier of LNG to the first land based LNG terminal to be constructed in Panama, scheduled by LNG Group Panama for start-up in 2017, in order to serve the country's first combined cycle gas turbine power plant. Aim to finalise the Tolling Agreement by 30 September 2014.
Current status: Project has been purportedly shelved. If you follow through to the contractors who are supposed to be building it, Duro Felguera S.A., they make no mention of it on their website or reports as a current project.
LNG disclosure: No updates reported
3. GNF (2mtpa). Signed Aug-13. As per LNG announcement: The term of the HOA is to 30 June 2014 and, under the provisions of the HOA, GNF will now undertake detailed due diligence of the MLNG Project and the Company will prepare the first draft of the proposed definitive Tolling Agreement (by no later than 31 October 2013).
Current status: HOA has expired.
LNG disclosure: No updates reported
4. AES. (1mtpa). Signed Mar-14. As per LNG announcement: AES will now participate in the negotiation and coordination of these agreements with the Company targeting to sign legally binding Tolling Agreement for the MLNG Project’s initial 2 LNG trains (totalling 4 mtpa nameplate capacity) in the first half of 2014.
Current status: The expectation was that LNG was going to support AES initiative in Panama – being a combined cycle gas power plant with PPA with ETSA. Due to start construction this year, completed end 2017.As per linked article (in Spanish) dated 29-Dec-15, AES Panama CEO is on record saying they have signed with GDF Suez out of Cameron LNG (for which GDF hold 4mtpa of volume). This will be hugely disappointing if it is the case as it will likely rule out LNG Ltd from any action in Panama and other re-gasification terminals owned by AES in that region.
http://www.estrategiaynegocios.net/centroamericaymundo/centroamerica/panama/915154-330/panamá-tendrá-primera-planta-energética-de-gnl
LNG disclosure: No updates reported
Now we have an opportunity funnel in shareholder presentations, no comments whatsoever on the identity of them, nor on the status of Gunvor, GNF and AES. You can forgive the market for discounting the legitimacy of many of the potential prospects.
Ability to manage risk and preserve capital.
1. The Company’s decision to undertake FERC process is a $100m exercise, which we have seen is mostly spent. One would think that in order to undertake such an exercise, you would want to have contractual certainty from BTA parties underpinning such spend. Perhaps not at the start but by a point in time (at least by FERC pre-filing). What we have is expectations that binding tolling agreements would be signed by late 2013, first half 2014. What has eventuated is only one BTA signed in mid-2015 and real uncertainty in 2016 of any others. What challenge was put by the Board to the continual spend in the face of delays in BTA’s?
In the Jun-Sept 15 quarter, LNG spent $30m on development with cash closing balance of $164m. They now have ~$114m cash having spent another $50m in the last 4 months and over $100m in the last 12 months. I would want to hear some justification as to why they didn’t stop the process or felt there was sufficient progress on remaining BTA’s to continue cash burn at the rate they have (which is only now been turned off).
This is coming from a company which has previously spent $100m on a project at Fishermans Landing to see it most likely completely written off. Now some will say that Shell pulled Arrow away to Curtis Island / not LNG fault – but again before you spend $100m and start site works wouldn’t you want some contractual commitment from Arrow (or some hurt money if they did)?
2. BTA parties.
- In hindsight, was it wise to sign HOA with Gunvor and AES, representing 37.5% of total plant capacity (i.e. 3/8) for competing greenfield re-gas developments in the same country? Gunvor process looks uncertain at best. Now it seems AES were not as committed as expected to LNG Ltd.
- Was it wise to sign with GNF who is a foundation customer of Cheniere and will be looking to offload surplus gas in those greenfield projects first?
3. Stonepeak
- I have said this previously. Stonepeak get ~50% of economic interest in Magnolia and don’t have any “at-risk” costs out the door. So LNG shareholders have spent $100m and Stonepeak get a free option on a good chunk of project in return for a negotiated IRR. What value therefore are LNG getting from them during this critical period other than a filler on equity requirement?
- Why didn’t / doesn’t LNG assess merits of an industrial equity partner – such as a trading house who can help offload some of the plant capacity? Have a look at Cameron LNG – Mitsui, Mitsubishi and GDF are all there.
- Goldsboro in Novia Scotia has Eon for 5mtpa and an upstream pipeline party as a 10% shareholder.
- Even on the Stonepeak deal there is clearly a shortfall in equity still required on any of the mtpa scenarios (including the 4mtpa). This is beause the EPC osts have increased since original HOA with Stonepeak.
- There is also public available information which purports that Stonepeak would rank senior to LNG equity. How does that work and is it justified – i.e. is their return capped?
4. KBR EPC & smaller plant economics
- Why don’t they have a backstop business case at 2mtpa or 4mtpa – the original base case. What scenarios have the board assessed on a smaller plant and why hasn’t KBR been asked to price 2/4/6/8 given plant is modular?
- The July decision to price 8mtpa, was this on a folly?
- The take out cost for one train from four, estimated by KSJV at US$630 million, was subject to final confirmation by 31 December 2015. Where is this at??
- Why not ask them to look at take-out cost out of two trains? Cant erode any more market cap than already has been done.
5. Tolling fees
- If you look at Cheniere’s latest presentation, which provides excellent insight into what we are up against, you may note the following. Sabine Pass EPC is $480/t. That is what we are up against. They have 4.1mtpa of unsold gas capacity under construction (incl. Corpus Christie). Average EBITDA/mmbtu on Sabine is $2.35 – similar to where LNG is trying to get to. Gross up (for operating expenses), tolling fees are $3.25 average
- So what is OSMR doing to place us relative to them if we are still at or about the same EBITDA/mmbtu…? Why don’t LNG better elaborate on feed gas production efficiency and how this may support more competitive pricing to peers?
- LNG flout our lowest capex/t (which may be right on greenfield) but aint going to help us against brownfield conversion projects that are more advanced and have surplus product. Hence back to need for BTA equity partners.
- PetroChina’s general manager for North America Natural Gas reckons tolling fees need to be closer to $2/mmbtu given where LNG prices currently are.
6. Westface BTA
- The BTA is subject to financial close no later than 30-Jun-16.
- What safeguards are being put in place to ensure this BTA is not at jeopardy?
- What risks are still open on the counter-party side on this BTA. Noting that Hoegh and Meridian have not reached FID yet and no further updates have been provided on website since Jul-15 BTA announcement.
If I were to surmise the current position – the company has a market cap of $300m. Arguably a sum of $100m cash, $100m capitalised costs in Magnolia (Fishermans Landing written off) and $100m goodwill value in Meridian BTA. The principal position of LNG should be to protect the costs expended to date and the BTA secured and ensure FID is achieved mid-year. If this comes at the expense of a smaller plant, higher capex/t or lower EBITDA/mmbtu then so be it.
As per the Dr. Fereidun Fesharaki video, there is some 25-35 mtpa unsold and potentially marketable gas in US alone. This will take a number of years to be digested. Hence LNG must commence construction with what they have in order to be up and running when surplus is absorbed.
Managing market’s expectations
1. An Apr-15 presentation - Targeting F
inancial Close in 2015.
2. A May-15 presentation – Targeting FID in Mid 2015 and F
inancial Close in Q1 2016
3. July-15 Meridian announcement – Brand: “Financial close for the Magnolia project is planned for
first quarter 2016”. “In light of market interest in the Magnolia LNG project, we have asked the KBR‐SK Joint Venture (KSJV) to provide a fixed‐price turnkey EPC contract price on the full 8 mtpa”
4. A Sept-15 update “Certain negotiations(with investment‐grade counterparties) are advanced and progressing through the internal investment decision authorisation processes attendant to each counterparty”
5. An opportunity funnel from the Nov-15 AGM with potential 20+ BTA parties.
6. An article in the press Dec-15 saying Maurice is “absolutely confident” FID will be achieved by
Q2 2016. Stating “nothing fundamentally has changed”. Alludes to advanced stage on a singular agreement with all focus put to it.
7. A watered down Jan-16 investor presentation with no timeline, positioning statements around conserving cash and most importantly halting all EPC activities till FID.
They can't keep shovelling out the same / dressed down old stuff in investor presentations and expect people to be happy with it or buy it - new or existing investors. As per the Dr. Fereidun Fesharaki video – it is “irrational exuberance” on the part of US LNG developers regarding the prospects of these projects. There is too much supply in the near term. And those brownfield developments with excess capacity are going to be marketing and pricing harder than LNG Ltd can – only need to look at Cheniere and Cameron LNG.
I am not questioning that they are trying to do all they can to close BTA’s in the circumstances. There are plenty of them having a go. I will list them for you, just on Maggie, - Maurice (CEO), Rick Cape (COO Mag), Norm Marshall (Group strategy), Andrew Gould (Group Dev), Ernie Meggnison (Dev Mag), Anthony Gelotti (Group Dev) and Gary Triglavcanin (Group Commercial).
But to clarify my point – my concern is that the Company is either giving over-optimistic expectations (which have consistently not been met) or potentially not giving proper insight into the true position. On the latter, to my mind, there are a number of events that have fundamentally changed the risk position that I have listed above. To discount shareholder concerns in a Fairfax article as a “bit of impatience” is inflammatory in my opinion, particularly when you have just spent $100m in 12 months with a whole lot of risk still sitting out there. When your milestones and timetable have consistently not been met. Or when 90% of your market cap has been eroded since your last significant “de-risk” event of the Meridian BTA.
I have put a fair bit of effort into this post. This isn’t for thanks or derision (i am sure to cop some of the latter). I do it because perhaps you might pick up the phone to the LNG office like I have and put the same challenges to them. Why aren’t LNG holding an open conference call with the investment community to address concerns? What more can they be doing to properly outline the position and/or scenarios to support a base case investment proposition?
Some of you will say they have - it is 6 or 8 mtpa. FID still re-stated Q216. Put up or shut up till that happens. But the progress as we stand here today doesn't support that position.
So maybe they can’t say anything because they don’t have anything substantive to say. Which means to say anything, will do more harm than good. Yet if they don’t have anything substantive to say, how can they still be absolutely confident of FID by Q216. Or hold the line that nothing has fundamentally changed?
