Small Caps | Jul 15 2014
-Arbitrage opportunity
-Attracts US hedge funds
-Further near-term catalysts
By Eva Brocklehurst
Liquefied Natural Gas Ltd ((LNG)) is one of the best performing stocks on the ASX this year. DJ Carmichael observes the stock has had an extraordinary run, to $2.20 from just 30c back in February. The reason? Simple gas processing, and having caught the eye of several large influential US hedge funds.
The company is bringing mid-scale projects to the international energy market and is based in Perth, Western Australia. The flagship project is called Magnolia, one of the most advanced US LNG projects. DJ Carmichael notes base case financials include production of 4mtpa, capital costs of US$2.2bn and earnings of US$380m per annum for 20 years based on 100% ownership. Equity funding is being arranged by Stonepeak and the company plans to sell down 50% to Stonepeak once this is completed. Debt funding, 70% of the capex requirement, is being arranged by BNP Paribas and is to be closed by mid 2015. First product is being targeted for mid 2018.
DJ Carmichael believes there is plenty of upside to come from a number of near-term catalysts such as an engineering, procurement & construction (EPC) contract update this month, environmental impact statement timeline in August and more binding tolling agreements by the end of the year. The US funds seem to view the company along the lines of the successful US-listed Cheniere Energy, which has executed on a similar business model. Woodside Petroleum ((WPL)) recently agreed to buy product from Cheniere Energy, taking advantage of an arbitrage opportunity to buy low-cost US gas and supply this into higher priced, oil-linked markets in Asia.
Liquefied Natural Gas plans to implement a simple tolling model, processing a customer's gas and charging for the liquefaction process. This means there is no resource risk for the company. The tolling party is responsible for the delivery of gas to the site and supply of gas. The opportunity is underpinned by the same arbitrage that Woodside obtained. Magnolia is a planned 8mtpa facility at the port of Lake Charles, Louisiana.
The broker observes the company's share price surge came on the back of authorisation for up to 8mtpa for export to Free Trade Agreement countries, securing a fourth tolling agreement and project filing with the relevant federal authority. This caught the attention of funds such as Baupost, Third Point, Valinor Management and Fairview Capital. DJ Carmichael thinks these funds saw the potential upside in the company's share price, as compared with Cheniere, which trades on an enterprise value/earnings multiple of over 20 times for 2016 estimates. Liquefied Natural Gas trades currently on five times 2019 estimates.
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