Going to reminisce about the good ol' days... flashback to a...

Going to reminisce about the good ol' days... flashback to a great post Timbo made on 22/05/16 which reverberated a few of my thoughts/ tracing the same steps i made on 30/10/17 for the SH meeting in Lake Charles. Was an intriguing, memorable trip!

The site visit was a 2 1/2 hr drive from Houston on an excellent 3 lane highway. And you know you're amongst oilers, with the skyline peppered with established facilities and new ones going up. Whilst they've seen past cycles, they're a tough group with a can do mentality. There is absolutely no doubt, MLNG has local support and the LC office will quickly fill when the team gets mobilized.

2 things struck me: the FERC meeting originally scheduled for 4 days was trimmed to one and concluded very, very quickly with no objections (contrast that with JC). The other was a picture I saw hanging on the wall in the LC office with a grinning JB walking through the vegetation on site back in 2014 after MB secured the site.

According to the guys who showed me around (and they are 2 of the best in the business with years of experience and local knowledge, in short know their stuff), they couldn't believe how good the MLNG site is. Repeat, it is a tailored made. Period.

Now whilst I'm no geo or engineer, it is patently clear to even a ferret that the site is a superb location within the Port of Lake Charles property. The canal, facility and site elevation visible to the naked eye not only provides protection from storm surges (1 meter has happened), but importantly negates the need to move millions of tonnes of soil (and of the right consistency) on which to build saving many $Ms. And to hear again the story of how MB nicked this from under BG's nose, is LNG folklore!

The KM pipeline is clearly visible running through the property and then runs underground across the channel as part of the previous import facility. There's an electricity sub station barely 2 miles away. Infrastructure is well developed and best of all, materials and fabricated storage tanks etc, will all be barged in and unloaded onto site. How good is that??!!

It's also an incredible compact site, barely 115 acres which is dwarfed by other compatible facilities but which cost vastly greater again underlining OSMR setting a new benchmark in LNG development in NA.

Now whilst I have no crystal ball and have been wrong before, having seen with my own eyes and heard with my own ears the views of those with vaste experience to the many questions I posed, I'm left with an overwhelming conclusion that LNG is fundamentally undervalued.

And that presents a wonderful opportunity for those who can see through the short term noise and see the LT potential.


My brief recollection of the visit:

Having seen the proposed site with my own eyes, its a beauty!! Located a stone throw away from Trunkline LNG Terminal (5 min drive) - 88kms (1hr 7) from Cameron, 111kms (1hr 28) from Sabine Pass - in the Calcasieu ship channel... there were a few massive tankers docked nearby in the Port of Lake Charles while seeing one casually lumbering through. Its not hard to imagine behemoth LNG tankers pulling up to our gem of a terminal in 4-5 years time. The sleek Magnolia office had elevated, picturesque views (from the right hand side) overlooking the port, a vantage point from the 18th floor of the Capital One Tower in the town of Lake Charles. From there its just a short 16km hop to the site.

Interested buyers are fully aware of our distinct advantages over rivals and coupled with an inspection of the site, should hammer home our greatness (and deals). First the Chinese (talks being with 2 key targets) visit Houston HQ now the Lithuanians... GV using words like, "important, excellent when describing those meetings". I'm sure those words have been used correctly in response to how he thought those meetings went but that does not imply they are going to sit down at the table and put pen to paper! These companies would be doing the rounds with all competing/aspiring US projects and weighing them up. All the hype and promise is warranted, it's not one BIG facade we're the number 1 project in the world that's at shovel readiness..... the penny has to drop!!


**Remember**... the tremendous advantage the US has today is two fold: Extremely cheap gas and having the ability to build liquefaction very competitively. The principal is that the natural gas business on a global basis is becoming a real commodity business and in that case if its a commodity business you need to be a low cost provider!!! Thats where the US and Magnolia are blessed. On a different note/ interestingly, Venture Global who has signed up 2 customers (Shell + Edison) and who have not completed the regulatory process or found financing... has claimed to have set liquefaction fees in the $2 - $2.25 range. I've been told by a company source that they see this as an unlikely aspiration (even calling it "fake news") BUT then again, they are signing deals so VG must believe it themselves!

The challenge is to keep the price of gas affordable to continue to support the growth and demand, that's not necessarily easy. These projects take 5-7 years to conceptualize and build and they are very expensive so you have to plan them correctly and continue to anticipate. The major issue today is that there is a break down in the business model that you need to adopt in order to continue to build the infrastructure.

The first generation was based on indexation to oil prices because most of the projects were substitutions from oil products to gas products. The second generation adapted to the US particularly because they have a very large resource base, a lot of natural gas, the infrastructure is already in place so you could take a tolling fee and change the way the world works... eliminate destination clauses giving more freedom to the market and allow the market to operate in a more disintegrated way. That worked well for a period of time but now with the liquidity created in the market and the very large spot market, that business model is more challenged - so you have to find a new way to meet the requirements of both producers and consumers of natural gas so you can find a way to build this infrastructure moving forward.

During the boom times of projects taking FID from 2002-2005 (106.1mt reached FID) & 2011-2015 (127.6mt reached FID) there were 4 quiet years in between with a minimum of 4.5mt - maximum 8.8mt of projects that were sanctioned. In 2016 14mt (although LNGL claim 5.9mt/ beg to differ) & 2017 3.3mt reached FID and I feel 2018 is going to be a relatively quiet year as well. Must understand the market goes in cycles and we've had to endure a natural lull in buying (glut) likened to the boom/ bust cycle. But... the next wave is slowly but surely gathering force!

Do we have the right formula? Is the sales pitch attractive enough or do our terms need to be tweaked? Who knows but what is determined is this ---> Importantly... future demand appears strong and certainly present, with calculated predictions exceeding supply by 22/23. The current LNG oversupply simply allows buyers time to sit on the fence, probing sellers on their willingness to diversify from traditional pricing structures, to adjust contract tenors, and to agree other buyer friendly terms. These efforts have slowed long-term contracting activity. Plus... this is a highly competitive market of sellers pitching their value and advantages. Buyers face the challenge of assessing both the economic opportunity of a proposal as well as "the probability that a developer’s proposal achieves a positive FID and becomes operational". For a willing buyer, long-term liquefaction offtake agreements represent financial commitments in the billions of dollars, which is a significant commitment for any company to make. When considering these issues and the magnitude of the financial commitment offtake contracts introduce, buyers diligence is understandable and patience on the part of the sellers is a a virtue.

Of importance but to a lesser extent (for the time being) than the elusive BTAs, is the next capital raise. It's the company's goal to raise $30 Million in 2018 and $100 Million overall which will see us through to construction. "When" we reach FID we'll be awarded a payment of around $60 Million (from memory but might be off the mark) upon financial close, without the need for additional CR apart from this years $30M, which also covers us through to construction. When the first shovel will be planted is shrouded in mystery but i'm betting mid 2019!

All i know is..... I'll be there!