WSJ article - LNG offers LT Gas Relief

To my knowledge, this if the FIRST article to appear in the Wall Street Journal and suggests it may pay to get on long before the gas starts flowing ....

LNG Ltd. Offers Long-Term Gas Relief
ENLARGE

By
Abheek Bhattacharya
July 24, 2015 2:35 a.m. ET
A wave of new supply threatens to engulf the market for liquefied natural gas. Yet companies such as Liquefied Natural Gas Ltd. can still sail smoothly. Sizing up its prospects, however, requires investors to do some long-term thinking.

The matter-of-fact-named company, though listed in Australia, will potentially run terminals that liquefy and store gas before it is exported out of North America. Facilities planned for Louisiana and Nova Scotia, Canada, could open by decade’s end.

Though low LNG prices and ample pending supply make investors wary, building and operating infrastructure is a long game. More important, LNG Ltd. isn’t a gas producer, but a terminal operator without direct exposure to swings in underlying gas prices. It plans to charge a fixed fee for liquefaction and storage, payable even if gas prices soar and buyers decide not to use the terminal.

Anyway, utilities and other buyers can’t rely solely on spot markets and so seek multiyear contracts, says William Frohnhoefer at broker BTIG. These buyers should be interested in low-cost U.S. sellers, meaning interest in LNG Ltd.’s services.

On Thursday, the company said that its Louisiana terminal, called Magnolia, had signed a 20-year binding agreement to sell gas, with German utility E.On. as the final customer. With that deal set and three others pending, almost 90% of Magnolia’s capacity is either under negotiation or spoken for.

Magnolia has to clear regulatory hurdles, though that could be a catalyst for LNG Ltd.’s stock, much as it was for New York-listed Cheniere Energy when its Sabine Pass terminal went through the same process a few years ago. Sabine Pass will export LNG later this year.

Magnolia’s final regulatory nod could come in the next few months. The Canadian terminal received a slew of approvals in the past week, too.

Still, given the substantial construction timeline, investors must make major assumptions.

ENLARGE
LNG Ltd. already has a 20-year deal with the German utility E.On, which owns this gas-fired power plant in England. Photo: Chris Ratcliffe/Bloomberg News

Assume upon initial operation that the tolling fee, net of operating expenses, is $2.25 per million British thermal units. And that capacity is up to three-quarters at Louisiana and half in Canada. Earnings before interest, tax, depreciation and amortization in 2020 could come to $990 million.

Next, assign a multiple to earnings to arrive at debt-adjusted market value. Cheniere trades at nearly 16 times Ebitda for 2017, its first big year of cash flows.

LNG Ltd.’s profits, though, are farther away and domiciled in a less tax-efficient Australian structure. Investors could multiply LNG Ltd.’s 2020 Ebitda 16 times, and discount that value backward in a way that accounts for the extra risks. Or they could assign a lower Ebitda multiple that already factors in those risks. To be conservative, take 8 times.

Back out debt of $2.4 billion racked up at each terminal, according to Mr. Frohnhoefer, to impute equity value. And assume that LNG Ltd. ends up with a 50% stake in each terminal, with the rest taken up by private financiers.

That gives the company a $1.56 billion value, 8% more than its market capitalization today. Relax assumptions even slightly—say, 9 times Ebitda in light of Thursday’s contract—and the upside is 42%.

LNG Ltd.’s business model makes it a port in the LNG storm. It may pay to get in on the company long before the gas starts flowing.

Write to Abheek Bhattacharya at [email protected]

http://www.wsj.com/articles/lng-ltd-offers-long-term-gas-relief-1437719705

Go LNG!