LNG: Imminent re-rate

With tomorrow’s DEIS ASX ann. the first since the CR 9 weeks ago, the regulatory timeframe & environmental impact is now very clear:

14/2/16 - Notice To Proceed (90d deadline after FEIS)
19/11/15 - AGM
16/11/15 - FEIS due date (per NoS)
??/??/15 - BTAs
??/??/15 - EPC Wrap KBR & SKEC)
17/7/15 - FERC publishes DEIS
20/5/15 - $174M CR (early works)
  1/5/15 - FERC Notice of Schedule
  1/5/15 - US Patent granted for OSMR
24/4/15 - Meridian Tolling Agreement Update

And when you consider LNG’s recent achievements (May investor preso - updates since in italics):

  KBR agrees to lead EPC joint venture with SKE&C (KSJV)
  Bear Head receives UARB permit to construct; holds 9 of 10 key initial permits
  Key staffing positions filled at both Magnolia and Bear Head
  Second US-based non-executive director appointed
  Bear Head signs MOU with the Assembly of Nova Scotia Mi’kmaq Chiefs
  Meridian LNG closes GSA with E.On accelerating Magnolia LTA negotiations
  FERC Notice of Schedule for Environmental Review received
  EPC contract terms and conditions agreed with KSJV
  US OSMR® technology patent granted
Receive Magnolia Draft Environmental Impact Study
Sign Magnolia Turnkey EPC contract
Sign binding off take agreements
Bear Head fully permitted
  Commence Magnolia early works program
Receive Magnolia Final Environmental Impact Study
MLNG FID and Financial Close
Receive Magnolia Notice to Proceed

I believe a re-rate is imminent with the EPC wrap possibly just days away and BTAs very, very close especially considering recent research from Fosters & Edison the recent CR and Meridan GSA with E.On.

(Don't forget Fosters published research shortly after Meridian TA ann. and before the CR ... Edison on Friday just before DEIS ... and dare I suggest ... the EPC wrap?)

(Fosters) We now view the Notice of Schedule being delivered early in the June quarter (delivered 30/4/15) as critical to keep the LNG target delivery schedule of 2019 on track. (CR early works re-enforces this)

Typically this is not a telegraphed timeframe to the market, but the company remains confident it is imminent. Why we continue to educate and focus on this in the Australian equity market is due to the focus we anticipate it will receive in the US. Typically it will signal:

1. From an environmental and safety point of view, FERC has accepted your resource reports to be in a form that satisfies a DEIS to be produced (FERC issued Friday).

2. Off take (tolling) customers will have a line of site to a Notice to Proceed (NTP) given this is when construction can start and estimate LNG delivery.

3. Equity markets will re-rate the project to be a ‘realistic’ chance of approval within the timeframe and therefore achieve FID timing. This is a significant point at which analysts will lower their risk weighting.

(Edison in the context of OSMR) Reports are worth referencing, but when companies are willing to put their own cash at risk via use of the technology, it should be more noteworthy. In this regard, both SKEC and KBR will be responsible for the execution of the turn-key projects at Magnolia and Bear Head and will be responsible for not just delivery on time/budget (‘delay liquidated damages’), but guaranteeing a minimum production level (‘performance liquidated damages’).

(Fosters) Upon signing the EPC contract with KBR and visibility of the final EPC capital cost we expect the market will re-rate the LNGL stock given the $/t installed capacity metrics based on the leading North American projects is well below the market for both brownfield and greenfield.

Fosters also make some very compelling points about the selection of KBR, namely:

• We understand the key driver for LNGL appointing KBR was to ensure deliverability of the 4 train case at Magnolia could be fast tracked to a 2015 FID decision (vs a two stage 2 trains) and also support the progress of future projects, namely Bear Head LNG starting FEED in the 2H 2015.

• Following on from a number of recent inbound enquiries as to the change in EPC contractor, we highlight KBR’s lead role as a positive for LNGL on a number of fronts:
  1. EPC credibility and experience in building LNG projects: For many years KBR was the pre-eminent EPC contractor in the build and commission of LNG plants globally having built circa 80mt of the ~240mt installed capacity. KBR have also missed the lead role on a number of large North American LNG export projects and see Magnolia and other LNGL projects as a way to claw back market share lost to Bechtel, CBI and others. Magnolia’s US$3 billion EPC contract is a material impact on their current order book and we understand they are bidding to win the Bear Head project.
  2. EPC resource pool of 27,000 employees: LNGL management have made it clear KBR’s global resource pool of EPC (and LNG) talent to scale up the Magnolia project team for an 8mtpa project required the confidence of the banks, prospective tolling parties and equity holders. Speaking to various stakeholders it is clear that Magnolia’s credibility has increased materially with KBR signed on to lead the EPC.
  3. EPC contractor influences the decision of your tolling customers. Given the role of the EPC contractor is critical to the success of this project from a banking, reliability and schedule perspective, we view the appointment of KBR will assist Magnolia in locking down bankable Tolling parties given it should increase the confidence of delivering the project to schedule and guaranteed capacity.
  4. Roll-out of LNGL’s model becomes clear: in our view, the appointment of KBR supports the technical resources required to successfully transition the EPC design and skillset to LNGL’s second project at Bear Head and other projects.
  5. Validation of OSMR as a low-capital intensity liquefaction process. While the majority of our clients have moved on from the questions surrounding OSMR’s liquefaction process delivering the 8mtpa of capacity for up to half the capital cost of its US peer projects, the appointment of an experienced LNG construction group of engineers to sign off on the OSMR process and take on material balance sheet risk demonstrates it should no longer be a headline focus area for risk in the project.

Final EPC milestones in the June 2015 quarter (Now whilst LNG missed this deadline, the $174M CR was in part to address this)

• In the June 2015 quarter we expect to see the following updates from LNGL to finalise the EPC contract and continue to de-risk the project. It is now key for LNGL to finalise the contract and capital cost before 30 June 2015 to maintain its target delivery of LNG late 2018, in our view.
• 1. KBR to initial the EPC contract, confirming all construction, schedule and banking terms are agreed. Guidance was provided in January for an April completion. (So yes, a miss)
  2. KBR to provide a final lump sum fixed price for T1-2 which converts the provision and lump sum component in Figure 1 below to a single lump sum amount. This amount will come with a 6 month validity period through to the end of 2015 when the company is targeting financial close. KBR will also provide an estimate for T3-4 which is for liquefaction only. Guidance was provided in January for a June completion. (So given this miss and we now have DEIS published, you would think the EPC is now ready for signing)

It's been a long wait today's DEIS announcement, but IMO we are on the cusp of a significant rerate and a new high.

And don't forget part of the CR was for a third NA project and a US listing beckons.

Go LNG!