See below Boudin. It is worth noting that apart from the fact that there is major upheaval in world financial markets nothing else has changed. This is a good time to wait patiently simply because as long as the world spins around and the world population grows there will be a demand for energy. Energy is as vital to the world population as oxygen is to a human being. Be patient.
This is what it said:
Event:
Magnolia LNG signs a binding Liquefaction Tolling Agreement (LTA) with Meridian LNG.
Initial Thoughts:
20yr legally binding LTA signed for Magnolia. LNG has confirmed the Magnolia LNG project has signed a legally binding LTA with Meridian LNG Holdings Corp (Meridian). Key terms include: initial term of 20yrs with an option to extend for 5yrs; firm capacity of 1.7 mtpa with an option for LNG to deliver additional 0.3 mtpa. While confirmation of this deal has been anticipated we view the significance of this deal to be:
1. This is the first material US LNG offtake agreement to be signed since Cheniere Energy’s last contract announced in December 2014;
2. This is the first binding offtake deal announced for a mid-scale project proposed in the North American market; and
3. Sends a message to the LNG bears that long-term binding contracts can be achieved despite the negative headwinds in the LNG sector. Golar LNG is also a great example of what can be achieved despite the negative sentiment.
We maintain our guidance on LTA pricing with a blended 4 train tolling rate at US$3/mmbtu. While there is no disclosure on the tolling fee, we maintain our guidance the LTA can meet our forecasts of a blended rate of US$3/mmbtu across the 4 trains (US$2.50/mmbtu exclusive of O&M costs). Given the market environment and ongoing discussions with parties for trains 2-4, we can understand why LNG has chosen not to disclose the economics of the contract. Management maintain there is sufficient demand for offtake at Magnolia given its pricing likely to be less than the liquefaction benchmark pricing set by Cheniere Energy at US$3.50/mmbtu.
Magnolia EBITDA across 4 trains generates US$979m in cash flow (100% basis). We continue to forecast 2021 as the first full year with 4 trains in production that will generate US$979m EBITDA (100% basis). We continue to model T1 commissioning early 2019 and highlight our EBITDA is on the basis of 6.8 mtpa guaranteed capacity only vs the 8 mtpa design capacity providing further upside to our earnings forecast.
Magnolia valuation maintained at US$9b unrisked. Using our key assumptions set out in our April 2015 note, we set our un-risked 4 train case at US$9.0b on a 100% basis. The near term risk to our valuation would be a material change in capital costs with the EPC contract now expected in the December quarter.
In our LNGL valuation we include a risked valuation of A$3.3 billion or A$6.92/sh and assume 55% LNGL ownership.
Meridian contract demonstrates LNG demand growth from Europe. LNGL’s confirmation of the Meridian LTA and its end user E.ON being an investment grade European utility reinforces our view the market for Magnolia’s gas will continue to see demand from Europe. We highlight the GSA agreement between Meridian and E.ON has capacity up to 5 mtpa.
FERC schedule now on track for January 2016 approvals. Last week we have seen the Draft EIS get published by FERC for the Magnolia project. This is in line with the prescribed approval timelines and sets up a line of sight to the Final EIS in November 2015 and increased confidence of final approvals early in Q1 2016 to support an FID decision. We view the delays in EPC and binding LTAs has also been a function of delays in the regulatory process.
Bear Head to come alive in Q4 2015. The Bear Head project also received a key milestone in the approvals process with the DOE providing approval for US gas to be transported to the Bear Head site liquefied and exported to FTA only countries. We view this is a stepping stone to the approvals for non-FTA later in the year and now sets the framework to work on US pipeline capacity deals to transport US gas to the site. Management are confident that Canadian NEB export approval could drop before the end of 2015.
Stock oversold based on conservative guidance provided for further LTAs and EPC.We view the share price reaction to yesterday’s ASX release not in line with the progress of the Magnolia project and the stock is oversold. We view this will be another turning point for the stock with many ‘fringe holders’ who appear to have sold based on the company missing its milestones and the potential for further delays in binding contracts and the EPC. We also view the LNG bears taking advantage of yesterday’s weakness as an opportunity to place further pressure resulting in significant volatility. We remain confident that management can deliver binding milestones before the guidance of late 2015 and now is the opportunity to buy the stock. A second binding LTA contract delivered before end of the current quarter is still a possibility and would light up the stock.
Houston site visit next week provides an update on Magnolia and Bear Head. Our team will be spending time with management teams for both Magnolia LNG and Bear Head LNG early next week in Houston. Meetings will cover regulatory, LNG marketing, financing and EPC of both projects.
LNG risked equity valuation maintained at $7.70/sh. Our risked equity valuation remains at $7.70/sh which includes a blended risk adjusted valuation for both Magnolia LNG & Bear Head LNG only and cash.
Upcoming milestones – Magnolia LNG:
Q3 2015: Binding fixed-price turnkey EPC contract from KBR-SK Joint Venture
Q3/Q4 2015: Magnolia LNG will provide an update on additional tolling agreements
November 16, 2015: FERC to provide Final Environmental Impact Statement
February 14, 2016: FERC to provide Federal Authorization Decision Deadline.
Recommendation:
We reiterate our BUY rating and our risked 12mth PT to $7.70/share. We view the stock as oversold on a risk/reward basis now that regulatory approvals have been de-risked and the Meridian binding LTA as the start for others to follow.
LNG Price at posting:
$2.50 Sentiment: Buy Disclosure: Held
