Shareholder Update, NY Aug13, page-9

A few further thoughts for consideration on a Sunday afternoon ahead of a likely market update tomorrow (with thanks to bortgm & bluey).

The EPC contract has taken extra time, but we believe that the delay is fully justified with the addition of KBR as senior partner in the contracting JV.

While the company hasn’t stated that they are preconditions, we believe that the combination of FERC approval and a signed EPC contract are an important source for potential customers. We did not expect to see an offtake contract before these milestones.

The hierarchy of contracts include 18.4mtpa of contracts in some stage of negotiation comprising:
7mtpa of the original MOUs;
1.7mtpa of SPA interest;
3.7mtpa of tolling agreements in draft stage, and
6mtpa in preliminary discussions.

An unexpected aspect of the discussion, which emerged during the question and answer period, was the misapprehension of some observers regarding the global context of, and internal differences between, the various North American LNG export projects.

We think offtakers do not assign the level of importance to current LNG spot prices that traders of commodity futures and energy stocks do: they have much longer time horizons, measured in decades.

Most NA LNG projects are not primarily in the trading business either, but are paid capacity fees to liquefy methane that they do not own. Their customers are not obliged to purchase natural gas if it is uneconomical, but only to pay a capacity fee. For an offtaker, NA LNG is not just a source of natural gas, it can also serve as a long term hedging strategy.

NA LNG is not all the same. Projects in the US Gulf Coast and the East Coast of the US and Canada are very different from projects on the West Coast.

The West Coast projects are typically far from population centres, and therefore from developed logistics and available labor forces. This, plus the topological and political challenges that confront the West Coast projects, make those projects much more expensive (we estimate by a factor of 300-400% more expensive in the case of the onshore BC projects) and with longer construction schedules than Gulf projects.

Magnolia LNG costs 25% as much to build as some of there shelved projects in NA, and has direct access to a broad, 70bcf/d market in natural gas from a myriad of producers who absorb all the commodity risk.

To clarify, the US DOE does not impose tariffs om either FTA or non-FTA exports - and there is also the prospect of dropping the project into a tax-advantaged MLP structure down the road.

We also think the physical proximity to Asia - the only remaining advantage the West Coast projects can realistically claim over other NA jurisdictions - is becoming effectively meaningless.

The old model of LNG contracts on point to point shipments in a closed loop between integrated producer/liquefier and oftener (usually a state-owned utility) is giving way to contracts between liquefiers/ marketers and offtakers/ marketers. The molecule is fungible, and therefore LNG cargoes will no longer be point to point, but are already becoming broadly swappable.

Magnolia LNG needs to finish the work it has begun relatively soon in order to remain on its timeline, a timeline which makes its capacity some of the only uncontracted 2018 capacity available in the Western Hemisphere. If it can do this, the structural advantages we’ve outlined will work in LNG Limited’s favour.

And as for the CR, some very interesting insights:

We would say that if a firm is raising capital, it ought to raise as much capital as it needs for its larger strategy, if the market is open. There is something to be said for building a war chest, rather than trying to get too clever calculating precisely how much capital is needed to hopscotch from catalyst to catalyst.

Magnolia LNG needs to be able to deliver cargoes to offtakers by 2019, and part of maintaining that schedule in the face of a long regulatory march is to move ahead with an early works program to prepare everything for a 2016 notice to proceed. We think the bulk of the funds from the offering would support those efforts.

There are different kinds of commercial contracts, and LNG AU has stated its flexibility: it is willing to do either tolling agreements or sales and purchase agreements if need be. If an exporter is signing an SPA, it needs to show it has the resources to post credit for gas volumes ahead of delivering cargoes.

Bear Head LNG needs to secure supply for its export project as well: we consider this to be as critical for Bear Head LNG, at its current stage of development, as a firm off take contract is for Magnolia LNG. We think some of the funds from the offering are earmarked for negotiating these matters.

There is also the possibility of acquiring a third NA project, but we think this would take a back seat to the progress of Magnolia & BH.

More broadly, demonstrating the ability to raise capital from sophisticated investors should help the firm lock-in commercial agreements. Larger market forces that are beyond the firms control (like lower spot prices and new capacity) require exporters to offer customers more options.

LNG Limited must be viewed from more perspectives than just daily trading and "the optics" of placement.

It is more important for potential customers to view LNG AU as a serious, well-capitalized counterparty that is committing financial resources to maintain its schedule and its commitments.

That pretty much sums up LNG in my book. So keep you nerve, buy more at these levels if you believe the story (DYOR etc) and try to keep a perspective between daily share price movements and LNG's strategic focus on establishing legally binding commercial agreements for the next 25-30 years.

Go LNG!