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Now it may start getting going!


The “golden age of gas” that was to usher in Australia’s next great resources boom in the form of Liquefied Natural Gas (LNG) appears to be on hold.  As evidence, witness the latest announcement from Chevron regarding its Gorgon LNG project.  The company recently announced yet another cost overrun, ballooning the original estimate of $37 billion to the current $54 billion.  As if that was not enough, the timetable for commencement of production was pushed back from late 2014 to mid-2015. The same story can be told for other large scale LNG ventures here.

Add to the toxic mix the threat that the “yanks are coming.”  This was a matter of speculation a few years back but has morphed into reality.  A February 2014 article in The Australian offered the following quote from a former official in the US Department of Energy predicting an LNG sales war:

•    “In Australia you have a saying, ‘no worries mate’, well I would say ‘be worried mate’ because the US is coming at you full steam ahead, and I say let’s have a healthy competition on this going into 2020.”

The share price performance of the four ASX listed Oil & Gas producers in the LNG sector has been less than spectacular.  There is an exception to be found in a junior O & G exploration and development company, Liquefied Natural Gas (LNG), whose share price is up 65% year over year.  However, the company has had its struggles in the past.  Here is a five year price performance chart for LNG:



In 2009 LNG was exciting investors with progress on its Fisherman’s Landing LNG project in Gladstone, including signed agreements with purchaser Golar LNG and natural gas supplier Arrow Energy.  The share price began to collapse as LNG tried to sell the entire project to Arrow; a deal that failed to materialise.   LNG management pushed ahead with development, convinced its business model of linking suppliers of natural gas with LNG exporters coupled with its patented processing technology could be successful.  LNG has developed a technology – OSMR (Optimized Single Mix Refrigerant) – which cuts LNG plant processing costs in half with a 30% increase in efficiency.  As of this date LNG maintains its 100% ownership of Gladstone Fisherman’s Landing, but the company now describes the project as in “care and maintenance” status with negotiations for securing a gas supply in progress.  

Investor interest in LNG was rekindled in December 2012 when the company announced it had set its sights on the US LNG market, through a wholly owned subsidiary, Magnolia LNG LLC.  Since then the share price has risen and fallen with news on the progress of the new Magnolia LNG project, located in the US state of Louisiana at Lake Charles.  So far, the news has been good, with the securing of a financing partner and a series of successful capital raises to fund development of the project in the proposal stages.   In addition there have been a string of key strategic agreements including one with Kinder Morgan Pipeline Partners for its Louisiana pipeline.  Magnolia expects final permitting in mid-2015, with construction to commence thereafter and production start-up by mid-2018.  Project potential is for eight million tonnes of gas per annum.  

With a footprint in both the US and Australia, LNG is generating market interest and multiple news reports of late.  The stock is hot and heats up with more positive news.  The latest was the signing of an agreement with Latin American energy provider AES Development Group for production capacity rights.  Supplying Latin American countries allows LNG to avoid the potential pitfall of the size limitations of the Panama Canal for large LNG transport carriers and further delays in expansion plans for the Canal.  The announcement of the AES agreement propelled the share price from around $0.30 to an intraday high of $0.58 before falling back down to earth.  

Despite its promise, cautious investors realise the 2018 production start-up target is a veritable eternity away.  Why invest in a speculative, high risk junior with no diversification in other energy assets when the performance of the major players has been tepid at best?  Here are some performance indicators for the ASX Oil & Gas Producers with LNG

Woodside Petroleum (WPL) is the only ASX stock with an LNG facility in production.  The Pluto LNG project began shipping in mid-2012 following multiple cost overruns and production delays.  However, the exuberance of bearish investors was not long-lasting as once Pluto went into operation Woodside started upgrading its production forecasts for Pluto within a matter of months.  Woodside is also involved as operator in another Australian LNG production facility in the Northwest Shelf (NWS).  Despite its experience with the NWS and the revenue generation from Pluto, sceptical investors and analysts are looking instead to the company’s latest LNG “problem child”, the Browse LNG project.  Woodside has rejected a land-based processing facility in favour of the industry’s latest advancement, a floating liquefied natural gas processing facility (FLNG).  In addition, the company is considering an FLNG for its newly acquired stake in the Leviathan gas field off the shores of Israel.

Woodside is now seen by some as a mature dividend payer with limited growth opportunity.  The 2013 Full Year results were somewhat disappointing, but fell within most analyst estimates.  Of Australia’s major broking houses, only JP Morgan has an Overweight recommendation on WPL, although the Full Year results led to a decrease in the price target from $40.26 to $39.47.  With the Browse project nowhere near completion, the Leviathan project in start-up stages, and no news on the company’s Sunrise gas project, analysts wonder about the growth prospects for Woodside.

Origin Energy Limited (ORG) is a diversified energy company covering electricity generation, retail and wholesale sale of electricity and gas, as well as exploration and production of oil and gas.  The company has a minority interest (37.5%) in the Australia Pacific LNG project (APLNG) along with Conoco Philips with the same interest and Sinopec with 25% interest.  The project will supply an LNG processing facility under construction near Gladstone.  The pipeline is nearing completion and production is expected to begin in mid-2015.  APLNG has also suffered from cost overruns, or blowouts in analyst-speak.  

In sharp contrast to rival Woodside, Origin gets four bullish recommendations from Australia’s seven major broking houses.  Yet the share price movements of the two companies over the past five years are virtually mirror images of each other.  Here is the chart:



Origin’s recently released Half Year results showed modest increases but the company disappointed investors with its lack of guidance for 2014.  However, according to Origin management the APLNG is now on track, although an analyst at Deutsche Bank noted any lift from the APLNG would not come into play until FY 2016.

Santos Limited (STO) is in an LNG partnership project with Malaysia’s Petronas, France’s Total, and South Korea’s Kogas, with Santos the largest stakeholder at 30% interest.  The GLNG project (Gladstone Liquefied Natural Gas) is now reportedly 75% complete with first shipments to take place sometime next year.  Shareholders of Santos also suffered the pain of declining share prices in the wake of cost overruns and construction delays on this project as well.  

The company’s Full Year 2013 results released on 21 February missed the mark, with a 17% decline in underlying net profit.  Despite management’s claim that GLNG is on track, analysts at UBS, Credit Suisse, and Macquarie caution that more cost overruns may be in the offing.  The stock price fell on the news.  Here is a one month price movement chart:



With its seductively low five year estimated P/EG of 0.54 and hefty two year earnings growth forecast of more than 90%, one would expect analysts to be largely bullish on Oil Search Limited (OSH).  Thomson/First Call reports 15 analysts covering the stock with only one Underperform and one Hold, while ten analysts rate OSH as a Buy and 3 as a Strong Buy.  While it trades on the ASX, Oil Search is based in Papua New Guinea where it is in the business of exploration and development of oil and gas.  The company’s entry into the LNG wars is the Papua New Guinea LNG (PNGLNG) project where it holds a 29% interest, along with majority holder and operator Exxon Mobil, Santos, Nippon Oil, and others.  This project is reportedly 95% complete and scheduled to begin shipping in the third quarter of this year.  The company recently acquired an interest in a joint venture that controls the Elk/Antelope resource, the largest undeveloped gas resource in Papua New Guinea.  

The share price for Oil Search is up 700% over ten years, rewarding its long term shareholders with an average annual rate of total shareholder return of 24.3%.  Here is the chart:



More cautious investors might be attracted to the healthy dividend yields from Woodside and Origin Energy while investors interested in growth potential could consider Santos and Oil Search; but what of the junior upstart, Liquefied Natural Gas Limited (LNG)?

This company trades in the over the counter (OTC) market in the US under the ticker symbol LNGLY with average volume around 1400 shares.   There is another stock in the world with the code, or ticker symbol, LNG.  This one trades on the New York Stock Exchange (NYSE) and represents a company called Cheniere Energy.  Based in Houston, Cheniere built LNG import terminals at a place called Sabine Pass in Louisiana back when it was certain the US would begin to run short on natural gas supplies.  Certainty can be an elusive commodity and as hydraulic fracturing unleashed a flood of natural gas in the US Cheniere’s facility, completed in 2008, sat idle.  In a move that now seems obvious; the company began the conversion process from an import terminal to an export terminal and was the first to get US Department of Energy (DOE) approval back in May of 2011.   More approvals and permits would be needed, especially for exporting to non FTA countries, i.e., countries with which the US does not have a Free Trade Agreement.  But investors took notice and the share price began to rise.   It wasn’t long before the bears roared out of their dens in droves pointing to the high costs and competition and a host of other doom and gloom issues surrounding the future of LNG exports in the US.  Some investors lost heart and ignored the stock as it reached a low of around $9 in May 2011.  One year later the stock was up to around $18 but, solidly in the teeth of market bears, the share price retreated, dropping to around $14.00 by November 2012.  Some took the risk, and today the US LNG ticker symbol trades around $50.  The following chart tells the tale: