Tankers: Floating Storage Scenario Analysis & Utilization Impact

Our 3-Stage Approach To Tankers For the Remainder Of 2020

• Our 3-Stage Approach To The Remainder Of 2020                            Pages 1-2
• Floating Storage Scenario Analysis – Impact On Utilization             Pages 2-3
• Storage Arbitrage, Inventories, & Rate Reactions                               Pages 4-7
• Multi-Factor Crude Tanker Utilization Model                                       Pages 8-9
• Updated Tanker NAVs, Valuation Metrics, & Estimates                     Pages 9-10

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Depth Of Floating Storage Build Key For Tanker Equities In Q220. Amid the double black swan start to the year (OPEC supply shock/pricing war coupled with demand destruction from the COVID-19 response), tanker equities have (generally) acted as a hedge against the rest of the energy tape, as the prospect of significant structural and arb-driven floating storage has supported tanker earnings well above seasonal trends (page 4). While increasing OPEC & Russian crude production battle to replace US exports (the degree to which remains in question) – the market mechanism for finding that new global production balance should ultimately result in saturated land based storage and a ramp in floating storage (already ~100mb), and narrower tanker capacity, providing a significant tailwind for tanker cash flows. From an equity perspective, we think about Tanker stocks (FRO, EURN, DHT, ASC, etc.) in 3 stages….(Pages 1-2)

What Would Robust Floating Storage Mean For Tanker Rates & Utilization In Q2/Q3? We ran a multi-factor scenario analysis based on our updated crude tanker utilization model, flexed for different levels of incremental daily crude production moving into floating storage over the next 2-3 quarters. At the low end of the range…(Pages 2-8)

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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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Noisy Neighbors: A Commonwealth LNG Deep Dive & Venture Global’s Engineering Update

Energy EPC: Venture Global’s Engineering Update & A Detailed Look At Their Commonwealth LNG

Venture Global LNG: Costs Ramping At Calcasieu?

Headcount, Parking Data Suggest Material EPC Inflation

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• Construction Details:                                                           Pages 1-2
• Parking & Headcount estimates                                        Pages 2-3
• Previous CPLNG Cost Curve                                               Page 3
• Our New CPLNG Labor Cost Estimates                           Page 3 
• EPC Costs – Expanded                                                         Page 4
• Key Questions From Here                                                   Pages 4-5

Forcasted Ramp In Craft Labor Headcount Indicate Costs Likely Trending Above Plan. Recent filings indicate that Calcasieu Pass LNG’s (CPLNG) average on-site workforce is set to more than double compared to company Pre-FID plans, while also introducing a night-shift. While there are likely several variables in play here, we believe the data (analyzed in the pages that follow), suggests that CPLNG’s on-site craft labor costs could increase materially……(data and our estimates on pages 2-5).

Parking Lot Infrastructure: In addition to the craft labor increases, there’s usually an increase in both indirect construction support infrastructure and the associated cost for that infrastructure. An example of this phenomenon is the reported increases by CPLNG in parking lot infrastructure. While not usually top-of-mind, ancillary factors like parking carry a real cost for projects this large, and significant increase in parking requirements would be felt in a projects budget. This same correlation is true for other indirect costs like lunch tents, lavatories, office spaces, personal protective equipment, health & safety supervision, small tools and consumables, radios and other IT equipment, trash removal, security, craft training, and on and on. That trend in data over the past year shows….(continued on pages 2-3).

While there could be several explanations for the ramp in labor (too many to list within a single note), if we were stakeholders we’d want to understand what’s actually driving the ramp in labor, and how any associated overrun in direct and indirect costs are being accounted for by CPLNG. While our cost overrun estimate (pages 2-3) is just that – an estimate – we’re confident the
fundamental relationship between labor head count and project costs have us pointed in the right direction.
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LNG’s Black Friday

LNG’s Black Friday: Endgame For TELL,
Magnolia (LNG-ASX) Gets Taken Out

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The Walls Close In Around TELL – Stock Down 72% This Week As Liquidity & Commercial Realities Finally Overlap. TELL has traded down 52% today, as continued commercial slippage, mounting liquidity concerns, and the broader market de-risking have combined to price-in the new economic reality for Tellurian: It’s not going to make it. The week started off with proponents of TELL/Driftwood wondering whether another presidential photo-op and some interim Petronet commercial progress could be stretched into an event meaningful enough to support a TELL capital raise and runway extension. It was a thin premise to begin with, and the list of plausible alternatives was already getting shorter. We believe what followed – first silence, then Petronet seemingly downsizing to a 1.0mtpa competitive tender, then an extension of the original Petronet MOU which brought TELL’s next maturity into play – was effectively the latest in a string of “the emperor has no clothes” moments for the remaining TELL bull thesis. It just happened to coincide with one of the steepest market corrections in recent history. See Pages 2-4 for more detail.

LNG Ltd. (Magnolia LNG) Magnolia LNG Developer Likely Going Private In $75MM Takeover Deal: We’ve suspended our coverage and estimates for LNG Ltd. On 2/28, Liquefied Natural Gas
Limited (ASX: LNG, US ADR: LNGLY) halted trading as it entered into a bid implementation agreement (BIA – Figure 2) with LNG9 PTE Ltd. Under Australian law, the bidder (LNG9) needs to get to 90% to force full consolidation, with options to get there if it doesn’t initially hit that hurdle. LNG9 will make an off-market takeover bid to acquire all issued ordinary shares of LNGL and take the company private (offer to shareholders to commence on April 2 and close on May 3). According to management the deal comes after a very thorough vetting of the market. Stonepeak also seems…See Pages 4-6 for more detail. 

The Golar Clean Up Trade – Let’s Get Schwifty

Golar Q4 Earnings Preview – Reorg Pressure Ramps

GLNG/GMLP Equity Thesis, SOTP Valuation:                Pages 1-2, 6
Our Expected Golar Reorg Solution:                              Pages 2-4
GMLP: Risk around Eskimo/Jordan Contract?              Pages 2, 7
DCF-Based LNG Carrier Asset Curve:                             Page 5
Asset Level Leverage, Est. Market Values:                     Page 7
Golar Power Updates:                                                        Pages 4, 8

Expectations For Golar Q4 Earnings: Heading into GLNG & GMLP’s Q4 earnings report on Tuesday (2/25), our primary focus is on (1) the timing, scope, and structure of a potential reorganization of Golar’s corporate structure – with our detailed expectations below. This includes a spin of its downstream business (Golar Power), the ultimate placement of its LNG carrier fleet, and what to do with GMLP (34% yield), (2) we expect GLNG metrics (adjusted EBITDA) to be roughly inline for Q4, and (3) the ramping risk profile of GMLP – particularly around its role in a reorg, its credibility as a currency, and (potentially) the quietly rising risk around the Eskimo FSRU contract (page 3).

*It’s worth noting that the GLNG/GMLP Q4 earnings call is endearingly scheduled to overlap with Cheniere’s (LNG, CQP), so street bandwidth may be a bit stretched, at least to the extent that if the reported numbers are a mess, the impact of clarifying (or pacifying) comments from a 10AM earnings call may be bit dampened. To be fair, we guess the reverse is also true. Should be fun.

Getting Constructive On GLNG. The pressure on Golar to reorganize its complex structure has only grown – punctuated by Luxor filing as an activist stakeholder in late January (8% holders). We think Golar likely moves to clean up its structure in the next 6 months, particularly as some of its earlier options (spinning off its LNG carrier fleet with 3rd party involvement) are likely off the table, and more controlled, in-house solutions seem more viable. We run through our expectations on pages 2-4, but here’s the punchline: We’d be long GLNG, and short GMLP in a reorg.

GMLP: Ramping Risk Around The Eskimo FSRU? The Eskimo is one of GMLP’s core assets (~$40MM of EBITDA), and is about to hit the 5-year mark on its 10-year contract with Jordan in May 2020. While it’s typically highlighted as a fixed 10-year contract, there’s actually an out in the Eskimo contract…(Page 2, 8)

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