There is a bit of financial gymnastics going on in this deal.
By moving up the capital structure from equity to preferred @ 12 years stonepeak are looking to front-load their returns - and I would expect - are happy with a lower IRR than they were under the previous structure.
This lowers the cost of capital for the project but defers much of the cash that can be distributed to magnolia shareholders out into the future. Breakeven on cash flow will get pushed out for sure.
The incentives are also heavily geared to magnolia owners now - keeping costs low and getting a few extra cents on tolling prices goes further to maximising value for magnolia shareholders than it did under the old model. Equally, stonepeak have insulated their returns from variation in capex costs and tolling prices and the risk falls on shareholders in a leveraged fashion.
So far its hard to say whether the new structure is better or worse than the old one. We would need to know stonepeaks new coupon rate, debt costs and where tolling fees actually end up - the range of outcomes on valuation is wide, and even moreso now that distributable cashflow will be deferred further out.
No doubt the stock is cheap though, even considering the wide range of valuation.
Doc - I dont think we should have equity participation from offtakers (unless it is fully offset by higher tolling pricing from a valuation perspective). There is no reason to offer equity incentives if you're the lowest cost operator. Let the competitors do this with their inferior economics!
LNG Price at posting:
69.3¢ Sentiment: Buy Disclosure: Held
