Liquefied Natural Gas Ltd: Assets And Long-Term Growth
Edison | Jul 16, 2015 01:40AM ET
Assets and long-term growth
Liquefied Natural Gas Ltd (ASX:LNG) has two LNG liquefaction projects in development with planned start-ups in 2018/19. The company is using its own patent protected technology (OSMR®), which should lead to lower capex and opex costs. Lump sum turn-key contracts are being finalized, while tolling fees arrangements mean that cash flows from the projects are predictable (and material). Despite the significant share price rise in the last 18 months, our modelling indicates that there is significant value accretion available for investors. Our risked DCF approach implies a value of A$3.7/share (US$10.9/ADR), but a NAV over time reveals that this could increase to over A$9/share (US$27/ADR) in 2019.
Financial close fort Magnolia in 2016
The company has made good progress. Although the financial close has slipped to 2016 (from mid-2015), the first production is still targeted as late-2018, as LNGL will begin early works on the site after the FID, due in 2015. Binding agreements with the tolling partners and an EPC are still awaited, but the company is confident of finalizing these in the coming months.
Funding: Magnolia and Bear Head
The Magnolia (US, 8mtpa) and Bear Head (Canada, 8-12mtpa) projects both have the potential to provide material cash flows for LNGL. Magnolia’s capital costs should be funded by a mixture of equity (from partner Stonepeak Partners) and debt (via BNP Paribas (PARIS:BNPP)), meaning that LNGL is fully carried. Bear Head is currently 100% owned and requires further funding, although should contribute significant value to the company.
Valuation: Material growth over time
With projects more than three years away from start-up, we rely on a mixture of approaches. Our current risked DCF is A$3.7/share (US$10.9/ADR), but we can view DCF-based valuation over time and cross-check with the implied valuation from peer multiples. Both approaches suggest material long-term upside to the current share price – possibly over A$9/share (US$27/ADR) in 2019/20, although investors will apply risk factors to project economics, given the current LNG market and development stage. With the low costs that OSMR® promises, we are optimistic that both projects will succeed, realizing value over time.
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