US LNG projects on the bubble face possible shakeout year in 2020

https://www.spglobal.com/platts/en/market-insights/latest-news/natural-gas/122419-commodities-2020-us-lng-projects-on-the-bubble-face-possible-shakeout-year-in-2020

LNG Update: USG Pricing Color & Mubadala Builds Its NEXT Stake

Updated Pricing Color For U.S. Developers: Cheniere, Shell, Venture Global, Next Decade, Freeport, Annova, Commonwealth, Delfin & More. Over the past week we’ve had several conversations with LNG buyers, project developers, and downstream operators, with the more pertinent color below:

LNG Pricing Currently Being Offered In The USG:
• Consensus Range: $2.25–2.40/mmbtu – Individual Developer Pricing Details On Page 2
• Outlier: $2.10-2.20/mmbtu – Individual Developer Pricing Details On Page 2
• Outlier: Offering ~$1.75/mmbtu – Individual Developer Pricing Details On Page 2

Favored Projects: Buyer With Some Effective Baseload Exposure – In the U.S. only really considering a handful of projects (page 2),  however, Qatar is the most likely – and buyer has option to pull from Ras Laffan or Golden Pass. Webber Note: the optionality here provides another window into how Qatar is marketing their entire ~100mtpa portfolio.

Venture Global: At least 2 buyers in Calcasieu potentially going back for more LNG in Plaquemines, site visits are still ongoing (page 3).

Project Roll Ups: One buyer speculated we’ll see some of the 3rd and 4th tier Greenfield projects get rolled up in 2020, as existing players look for cheaper growth optionality and early stage projects solve for funding issues. Webber Note: we agree, and think it could start in the next quarter or two, with a Brownfield or well-funded player consolidating some pre-FEED or pre-FERC powerpoint projects.

Mubadala Builds NEXT Equity Position: On 12/12, NEXT filed a shelf registration for 10.1MM shares, controlled by Mubadala Investment Company (Mubadala) – 8.0MM of which were issued to Mubadala on 10/24 (at $6.27/share) and 2.1MM of which Mubadala acquired from another shareholder (we believe BKR). While the stock traded off 4% as the registration headlines spooked the market a bit (unfortunately, a relatively predictable outcome, even for a maintenance filing), the stock regained the lost ground relatively quickly. We view the BKR sale (via BHGE) as mostly a post-spin cleanup effort, with at least  read through here that Mubadala likely wanted more equity than NEXT was willing to issue on a primary basis.

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LNG Update: Frozen 3? Funding Hot Potato For Novatek’s Arctic 2

Keeping An Eye On Budgeting Process For Arctic 2

Who Picks Up The Check For Arctic 2? The timeline for Novatek’s high-profile Arctic LNG 2 (19.8mpta) may have hit a modest speedbump, as the ~$1.9BN request to help finance critical aspects of Arctic 2 [the Utrenneye LNG terminal on Gydan peninsula (page 4), and reloading terminals in Murmansk (for European cargoes) and Kamchatka (for Asia cargoes)] are absent from Russia’s 2020 draft budget. While the project has already reached a positive FID, and is clearly a national priority – we think it’s worth watching whether any squabble over the ultimate funding source ends up delaying its operational timeline (which is already ambitious). The primary options appeared to be (1) the state budget (now absent), or (2) funding from the ~$124B National Wealth Fund, which appears to be a more complicated….

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GLNG: Tangled Structure Clouds Golar Power Growth

Golar Treading Water Post Q3 Earnings. GLNG traded up ~1% late last week after posting relatively tepid Q3 results, regaining some early lost-ground following a disappointing headline number (below). While we continue to think GLNG looks washed out here ( ~0.7x our NAVe), we think a positive mean reversion remains dependent on Golar eventually simplifying their structure – a long-delayed process that could now kick off in H120. We hope…

Golar’s LNG Carrier Spin Entering Chinese Democracy territory. GLNG’s long-awaited LNG Carrier spin (the likely first step toward simplification) has officially been delayed to 2020 after the partnership structure between Golar and other participating owners collapsed – we believe Awilco & Cardiff Gas (at least at one point). As you may recall, we noted that Cardiff Gas had been marketing their PE-backed, on-the-water fleet separately since the early fall, which we viewed as a solid indicator that the potential consortium was in trouble.

Golar will now look to spin-off its LNG carrier fleet via a direct U.S. listing of the GLNG-only vessels, which is now set for 2020 (presumably H1). The perpetually sliding time frame has become a headwind for the stock, and an obstacle for simplifying the Golar structure. While the softer 2019 market has a lot to do with that delay, we think the clock is starting to tick pretty loudly at this point when it comes to GLNG executing a spin without taking a meaningful loss…

Spin Logistics. Our primary question/concern at this point revolves around how levered……

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Webber R|A: Vertical LNG Weekly

FERC Approves 4 Texas LNG Projects: On 11/21 The Federal Energy Regulatory Commission (FERC) voted in favor (2-1) of all three Brownsville LNG export terminals (below), along with Cheniere’s CC Stage – 3 expansion – granting all 4 projects final approval. Among those approved:

• NextDecade’s (NEXT) Rio Grande LNG (~27 mtpa)
• Annova LNG Brownsville (~7 mtpa)
• Texas LNG Brownsville (~4 mtpa)
• Cheniere’s (LNG) CC Stage – 3 expansion (~9.5 mtpa)

The approvals made meaningful progress for the projects, and come amid an uptick in local environmental pushback in Brownsville. While FERC approval is certainly helpful, all 4 projects still require meaningful commercialization targets to reach positive FID. We remain buyers of LNG and NEXT, as we view the Texas coast as the path of least resistance for associated Permian gas to reach the international markets.

Creating A Residual Value Floor: It’s also worth noting that we think the combination of an advantaged location and FERC approval effect helps create a meaningful asset and (to some degree) a valuation floor for the respective development companies. While we think the idea FERC/Site asset would have most of its practical relevance in a distressed scenario, we think its meaningful none-the-less, and not something we feel would be equal among projects (due to proximity advantages to the Permian).

European Investment Bank (EIB) Announces Phase Out Of Fossil Fuel Lending: Roughly two weeks before the 25th session of the Conference of the Parties (COP 25), the European Investment Bank (EIB), EU’s nonprofit long-term lending institution, announced it would (effectively) stop lending to fossil fuel projects, via particularly tight environmental guidelines. While the move is another meaningful step towards the de-carbonization of Europe, the immediate impact on LNG infrastructure is highly muted. For scale, the EIB lent out ~€11.8BN between 2013 and 2017, compared to JPM financing ~$62.7BN in 2018 alone. It’s also worth noting that the EIB can choose how they define alignment to the Paris Agreement, while others (World Bank, EBRD, Asian Development Bank, etc.) can choose different interpretations, and these institutions will still be able to finance midstream/downstream gas and gas-fired projects. On a more granular basis, most demand (and incremental lending) for natural gas projects now comes from non-European markets. Which typically has access to wider pockets of capital. For example, Mitsui recently invested in a major gas-fired power plant in Thailand, with financing provided by the Japan Bank for International Cooperation. Hence, we think the EIB move is material in the sense of sector leadership, but we aren’t expecting a dramatic market impact, at least at this point. Other notable takeaways from the EIB announcement: …….

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Webber Research: Global Shipping Weekly

Russia May Delay IMO 2020 Compliance:

Russia, a large producer and exporter of high sulfur fuel oil, intends to delay full implementation of IMO 2020 regulations until 2024. This will only be in effect within local waters (including Belarus, Kazakhstan, Armenia and Kyrgyzstan). Despite investments in Russian refineries, only one Russian oil producer (Lukoil), has the ability to produce fuel that complies with IMO 2020 standards. It’s worth noting that, IMO regulation enforcement falls on Russia, not the IMO itself. While there are audit mechanisms for corrective action plans, there are no punitive measures for violations. Earlier this year, Indonesia also flirted with the idea of not enforcing IMO requirements, but later backtracked and pledged commitment to the IMO 2020 standards.

Tanker Spot Rates Continue To Slide:

VLCC spot rates (TCEs) down last week with rates ending at $54.8k/day (-23% w/w and -81% m/m). Suezmax TCEs ended the week at $39.0k/day (-28% w/w and -76% m/m) while Aframax rates ended the week at $21.5k/day (-23% w/w and -63% m/m). As the market digested the chaotic past few weeks, owners are starting to temper expectations with freight rates and have been giving up gains. We note rates remain well-above mid-cycle levels.

IMO 2020 Update:

Earlier this week EURN signed a partnership with T.A.G. Marine, operator of Kuala Linggi International Port (KLIP), that will allow EURN’s ULCC Oceania to float and

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LNG Update: Shut-In Cargo At Sempra LNG’s Cameron T1 – How A Freight Fiasco & Narrow Arb Killed A Cargo

First USG Cargo (Technically) Shut-In, After Pavilion Fails To Lift. We believe one of the first LNG cargoes from Sempra’s Cameron LNG T-1 was technically shut-in, after Pavilion Energy (via Mitsui) effectively chose to eat the liquefaction fee while failing to lift the cargo. To our knowledge his marks the first USG LNG cargo to fail in this manner – with a mismanaged freight book and narrower arbitrage being the primary drivers.

We run through the details below in our note, but here are our quick takeaways:

1. While this fits a broader “tight/closed arbs will lead to USG LNG shut-ins” narrative, this has as much to do with freight mismanagement (at the customer level) as softer LNG prices.
2. It highlights the amplified importance of freight within the LNG value chain. As we stand today, freight costs equate to ~40% of LNG cargo value.
3. To be clear – we believe Sempra LNG (SRE) got paid – we’re not viewing this as an indictment of the exporter model or the start of a hyper-bearish trend – but we do think it’s a warning shot that shows how delicate the economic balance can be for some merchant and committed volumes alike.

Meanwhile Cheniere Is Playing Chess, Not Checkers. At roughly the same time as hyper-expensive LNG Carrier rates helped drive the first LNG cargo failure elsewhere in the USG, we think Cheniere could actually start turning generating some significant cash (details in note) with its freight book. Cheniere (LNG) currently controls ~25 vessels (details in note) – intuitively getting long freight into peak season, rather than getting cute – and according to our channels started actively looking to charter-out 6 of those vessels this week – i.e. taking excess swing capacity they secured at/near mid-cycle…

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Cheniere: Previewing Q319 Earnings

Cheniere – Getting Ahead Of LNG/CQP Q319 Earnings…

Earlier this week we put our deep dive into Cheniere’s Q319 results (LNG/CQP), with a focus on
1) Narrow export arbs and the impact on CMI margins
2) A look at early peak season and floating storage/global inventories
3) Brookfield’s 25% investment in Cove Point and the valuation implications for CQP/Blackstone
4) Commercialization progress for Cheniere’s next growth phase: CC-3
5) Updated SOTP valuation for LNG – broken down by train, and SPA…

10 pages of pre-earnings LNG fun…

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Webber R|A Call Series: EPC Risks – KMI’s New Elba Island LNG Timeline Likely Slips Materially

Highlights From Webber R|A Conference Call Series W/ EPC Risks CEO, Eric Smith

Diving Into EPC Risk:

Friday we hosted Eric Smith, CEO of EPC Risks for our inaugural Webber R|A LNG Conference Call Series – which we think was particularly timely as the market gradually shifts more of its focus from the binary event-risk (FID risk) that has largely defined the LNG cycle for the past 2 years, and toward LNG project construction/execution risks (EPC risks). Our call with EPC Risks CEO Eric Smith focused on the issues they’re seeing in certain timelines over the near-term (KMI’s Elba Island), the impact that restructuring headwinds (McDermott) can have on project timelines (Cameron LNG/SRE), and the viability of low-cost models like Venture Global’s Calcasieu Pass.

Among the major takeaways:

according to EPC Risks, there’s a zero percent (0%) chance that KMI hit’s the Elba Island timeline they highlighted on their earnings call last week (i.e. – 3 more units in place this year, remaining 6 within H210).

Relevant Companies/Stocks:

Kinder Morgan (KMI), Sempra LNG (SRE), Cheniere (LNG, CQP), Tellurian (TELL), NextDecade (NEXT), McDermott (MDR), LNG Limited (LNGL), Energy Transfer (ETE), Royal Dutch Shell (RDS.A, RDS.B), Baker Hughes (BKR), Fluor (FLR), Chiyoda (6366), IHI (7013), Venture Global LNG (Private), Bechtel (Private).

Webber R|A: Vertical LNG

As part our launch materials for Webber Research & Advisory, we introduced our Vertical LNG presentation series, which includes a full overview of the entire LNG value chain, from Liquefaction to Regas, including our Global Project Rankings, individual company theses on Cheniere (LNG/CQP), Tellurian (TELL), NextDecade (NEXT), LNG Limited (LNGL), Golar (GLNG/GMLP), Gaslog (GLOG, GLOP), Teekay LNG (TGP), and several private projects, including Venture Global. Our thesis is premised on emerging Supply Push dynamics, and the impact they will likely play on global project FIDs and the forward LNG supply/demand balance, with a clear focus on 1) Proximity to the Permian Basin 2) EPC quality (emerging construction risks), and 3) tangible commercial progress. Over the next 3-4 years, we expect a significant shift in focus downstream, as the global market works to clear incremental LNG into both traditional demand sinks (China/Europe) as well as the emerging markets. To that point, our dynamic LNG supply/demand model probability weights +100 emerging market FSRU and gas-to-power projects, to arrive at a more thoughtful EM demand forecast, which we think is helpful in vetting potential off-take partners and the underlying viability of large-scale export projects.

Initiating Coverage On The Full Export Infrastructure Spectrum

Coverage Launch & Updated London Agenda: We’re very excited to have formally launched coverage of the LNG space (LNG, CQP, TELL, NEXT, LNGL, GLNG, GLOG, GMLP, GLOP, TGP, etc), Tankers (FRO, DHT, EURN, ASC), LPG Exports (NVGS, LPG), Containers (TRTN, CAI, etc), and Barges (KEX) as well as a number of private companies/projects.

Included in our launch packet yesterday:

• Our new Vertical LNG sector deck: ~80 pages of project overviews, Project Rankings, and our thesis around each LNG vertical within the LNG supply chain (export projects, LNG carriers, downstream gas to power). We also included our first Outperform rating (ever) on a Greenfield LNG project (NEXT) and highlight our other top picks (LNG, GLOG, etc)/ major risks across the LNG space, including our focus on Supply Push dynamics.
• Our launch on the Tanker, LPG, Container, and Barge sectors as well, including our thoughts on the impact of Cosco Sanctions, and IMO 2020 implementation
• Our ESG Scorecard, and our plans to incorporate Carbon disclosures
• Our takeaways note – Gastech Houston 2019: We’re Going To Need A Bigger Boat

If you’d like access information, please reach out to us at [email protected], or email me directly at [email protected].

Webber Research: Q219 ESG Scorecard

Webber Research Q219 ESG Scorecard

New Logo, Same Idea. Along with our launch, we also included our Webber Research ESG Scorecard, as we’ll be incorporating additional factors that broadens our models score to include carbon disclosures (below). The scorecard that follows is effectively identical to the scorecard we released in Q2 – the model, data, and scores are inline with Q219 results. Redistributing our ESG Scorecard allows it to serve as a baseline for our model at our new Webber Research & Advisory platform, while also reiterating our commitment to further integrate ESG dynamics into our process. To that point, we intend to imbed each company’s ESG Scorecard quartile prominently within our company notes, to put it on par with other data often highlighted in equity research.

New Carbon Factor. In Q2 2020 we intend to incorporate the disclosure of Carbon data within public company filings as a new factor within our proprietary multi-factor ESG model. Our new Carbon Factor is aimed at aligning certain aspects of our corporate governance framework with the primary metrics found within the Poseidon Principles, and intended to help facilitate the disclosure of carbon data to investors.

The Idea: The premise that underpins our ESG framework is simple – we believe there is no longer a place in the public shipping markets for companies that do not prioritize strong corporate governance and capital stewardship. We believe that risk premiums associated with poor governance and capital discipline should continue to widen, eventually pricing-out conflicted players and antiquated structures from the public markets.

What Is The Webber Research ESG Scorecard? Our scorecard ranks our public  universe on a number of corporate governance metrics, with the goal of identifying both high quality platforms and points of conflict based on those underlying factors. Our scorecard crystallizes a framework that’s been core to our investment strategy and coverage, while also aimed at keeping conflicted entities from relying on anonymity or indifference to perpetuate what’s become a consistent headwind for the sector.