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W|EPC: Corpus Christi LNG Project Update – Q424

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W|EPC: Port Arthur LNG Quarterly Project Update – Q4234

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W|EPC Utilities & Energy – Sempra Deep Dive – Oncor, March 2020

 Sempra (SRE) Capital Project Analysis – Oncor March 2020.

As part of our W|EPC Utility & Energy Project coverage, we’ve put together a deep dive into a number of large public utilities, including SRE, SO, D, AEP, CNP, ENB, EPD, ET, KMI, XOM, TOT, RDS:A, and others. We’ve included more information about our W|EPC Utility & Energy project coverage in the back of this presentation.

Given its size, and the sheer volume of projects and jurisdictions, we’re breaking our Sempra (SRE) coverage down into underlying components, with our Oncor deep dive below. Oncor Electric Delivery Company, LLC, is headquartered in Dallas, TX and is a regulated electrical distribution and transmission business. It is owned by two investors, SRE (80.25%) and Texas Transmission Investment LLC (19.75%).

Our Key Takeaways On Oncor:

  • Out-sized Role In Critical TX Projects
    • Oncor is involved with 5 out of the 10 most important projects to provide more efficient electricity dispatch, while supporting the increasing electrical demand in Texas. (Page 5)
  • Oncor vs. Other Investor Owned Utilities
    • Oncor has 156 more projects scheduled to be completed in 2020 than AEP, ET (50% AEP/50% Berkshire Hathaway) and CNP combined. (Page 8)
  • Final Estimates vs. Final Actual Costs
    • Over the last 15 months, Oncor’s reported final construction costs for 190 projects were 12% higher than their final estimated costs. (Pages 9-10)
  • Lubbock Power and Light
    • Oncor’s May 2019 acquisition of InfraREIT included a variety of electricity transmission and distribution projects & assets, which included ~$3600MM joint project with Lubbock Power and Light (LP&L). (Pages 13, 17-20)
  • Future Project Opportunities
    • The integration of LP&L to ERCOT should reduce congestion costs in the Panhandle of Texas and increase demand for new transmission projects in/and around Oncor’s coverage area. (Page 4)

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Tankers Reset As OPEC War Changes Economics

  • Market Updates & Thoughts………………..Pages 1-3
  • Tanker Trade Dynamics………………………Page 4
  • Fuel Spreads, Economics……………………Page 5
  • Crude/Product/LPG Rate Changes…………Pages 6-9
  • LNG Arb, Freight Dynamics…………………Pages 10-11
  • Container Fundamentals……………………Page 12
  • Relative Valuations…………………………..Pages 13-19

Tanker Spot Rates Soften Off Of Peak Levels As Saudi Reign In Freight Rebates: Spot rates weakened on slow fixture activity, crude prices bounding from under $25/barrel to ~$30/barrel (Brent), and Saudi Arabia announced limiting freight compensation to 10% of crude’s official selling price. According to TradeWinds, at least 10 VLCC & Suezmax spot fixtures loading Saudi crude had failed last week. VLCC spot rates (TCEs) led the decline with rates falling to $135.3K/day (-52% w/w and +408% m/m), Suezmax TCEs at $70.0K/day (-42% w/w and +166% m/m), and Aframax TCEs firming to $59.5K/day (+39% w/w and +120% m/m). We note rates remain well above consensus.

Roughly Half Of Bahri’s VLCC On Subject Destined For USG: Last week, Saudi Arabia’s Bahri put 25 VLCCs on subject after their announcement to flood the oil market (by increasing its production and lowering its oil price) in response to OPEC+ disbandment (see our OPEC+ Fallout note). VLCC rates had spiked as Saudi Arabia was said to provide freight rebates to some customers for crude transports between Saudi Arabia and Egypt. Bahri owns 41 VLCCs and rarely enters the spot market to charter third party tonnage. In addition to the large number of subjects, the intended destination for these vessels are telling of Saudi’s intent: 10 of the 25 VLCCs are destinated for the U.S. Gulf, 4 are likely going to Europe, 10 are fixed to discharge at the entry point of the Sumed pipeline (Ain Sokhna) which transports crude oil through Egypt to the Mediterranean (likely to end up in Europe). None of the spot VLCCs are fixed to Eastern destinations.

Scrubber Payback Period Upended Following Crash In Crude Prices: The spread between HSFO and LSFO has narrowed to $87/mt in Singapore and $47/mt in Rotterdam (Figures 2 & 3), extending the payback period to ~4 years. A VLCC fitted with a scrubber is able to command a spot earnings premium of ~$4.5K/day, down from nearly $20K/day at the start of the year.

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LNG Canada Update: Shell, Fluor, JGC, & Force Majeure

  • **March 18 Update………………………………….Page 2
  • Executive Summary…………………………………Page 3
  • COVID-19 Impact……………………………………Page 4
  • EPC Schedule Analysis……………………………..Page 5
  • Site Labor Analysis 6………………………………..Page 6
  • Site Labor EPC Cost Impact……………………….Page 7
  • Conclusions…………………………………………..Page 8

Update: In light of yesterday’s announcement that the Shell-led LNG Canada project was cutting its staffing levels in half over the coming days, we felt it worthwhile to pass along our LNG Canada Update from late February, along with a slide on our updated thoughts. (Page 2)

COVID-19 Impact Updates
1. The World Health Organization (WHO) officially declared COVID-19 a pandemic on 11-Mar-20.
a. JFJV may have a stronger FM claim now that WHO has declared the COVID-19 a pandemic, to the extent that JFJV specifically has “pandemic” or “epidemic” listed as an FM event in their contract.
b. FM Impact of Chinese module fabrication yards…….Page 4

2. On 17-Mar, LNG Canada and JFJV both announced that JFJV’s on-site workforce in Kitimat would be halved in order to increase social distancing and help prevent the spread of COVID-19. Given that the announcement was made jointly between JFJV and LNG Canada – impact on FM/schedule relief.…..Page 5

3.While JFJV did not announce when the site at Kitimat would resume a full workforce, it took “several” weeks for workers to return to JFJV’s Chinese fabrication yards…..Page 5

LNG Canada Planned Vs Foretasted Progress Where Were We In February, and Where Are We Heading Now?…..Pages 5-8


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OPEC+ Fallout: Contagion Everywhere From Looming Price War…

***From Sunday 3/8***

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Tankers Among Few Eventual Beneficiaries

  • Impact On Tankers:                                                                                     Page 1, 3-5
  • The 2015 Tanker Comp, Similarities, Implied Upside                         Pages 3-4
  • Impact On LNG Developers (LNG, TELL, NEXT, GLNG, NFE)            Pages 2-3
  • Historical & Implied Equity Correlations To Crude Vol                       Page 3
  • NAVs: Current, Mid-Cycle to Trough Range                                          Page 3
  • OPEC+ Background                                                                                   Page 3, 6

This Is Going To Hurt: On Friday (3/6) talks between OPEC and its OPEC+ allies (Russia) over a corona-related production cut collapsed, sending oil prices down with it (Brent and WTI down 9% and 10%, respectively on Friday). While the lack of OPEC+ support for crude prices was enough to rattle markets, what’s transpired since – the relationship between the Saudis and the Russians rapidly devolving into what looks like an all-out pricing war – has the potential to reshape energy markets for years to come, and will likely take the mantle as the most value-destructive policy shift in decades.

Exogenous Demand Shock, Meet Exogenous Supply Shock. As noted below, Aramco has already come out with discounted crude prices (OSPs) on the back of the meeting, and is reportedly speaking to a potential production ramp from its current 9.7mbd, to well above 10mbd, and could even reach a record of 12mbd. Again – that would be additional supply into a market that’s already oversupplied amid global efforts to contain the Coronavirus (nCoV) weighing on demand. While the Russians have less available swing production, what they do have will be moving in the wrong direction as well, as they look to grab share from U.S. Shale producers.

How Does This Impact Our Universe:
Tankers: We’ll Call It Mixed… (And That’s One Of The Few Bright Spots). Once the dust settles the tanker group, including FRO, DHT, EURN, ASC, etc, should be one of the few actual overproduction beneficiaries as: 1) tanker activity and rates are generally positively levered to production volumes (including overproduction), and 2) we expect to see floating storage, both economic (as the front end of the crude forward curve collapses (already in progress) and…….continued on Pages 3-5

Most Relevant Tanker Comp: 2015, after OPEC failed to respond to falling crude prices. While overcapacity and falling crude prices ravaged the rest of the energy markets, Crude Tanker rates (VLCCs) averaged $65K/day (Figure 4) – a level not reached since 2008, up 116% y/y and the firmest level in nearly a decade. What would 2015 day rates mean for current tanker stocks? If we replaced our current 2020 rate decks with the 2015 average rates….continued on page Pages 2-3

Everything Stops. If nCoV brought the near-term prospects of new LNG business to a particularly slow crawl, we believe the OPEC+ blow up will bring it to a full stop, at least until the dust settles. For companies in the process of restructuring (like TELL).….continued on Pages 2-3

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