Last year's 'wonder stock', Liquefied Natural Gas Ltd (ASX: LNG), today shrugged off concerns over plummeting oil prices with shares roaring as much as 20% higher in morning trade.
However with the company's share price up a jaw-dropping 1,547% since the beginning of 2014 you'd be mistaken for thinking the run of LNG Ltd is over.
Today's announcement, which comes from its fully-owned subsidiary Magnolia LNG, could be just the beginning of more positive news.
However, future announcements could also go the other way…
Here's why LNG Ltd continues to soar…
LNG Ltd owns two LNG liquefaction and export facilities in North America. Its two proposed facilities are Magnolia LNG in Louisiana, USA, and Bear Head LNG in Nova Scotia, Canada.
These facilities will turn gas – which is piped to them at no cost to the company – into LNG, which is then stored before being loaded onto ships. These ships then transport the gas to energy markets throughout the world, where the process is undertaken again – only in the opposite direction.
Here's a screenshot from the company's announcement today.
Since both of LNG Ltd's major projects are yet to be constructed the company's management has been working tirelessly to create EPC (Engineering, Procurement and Construction) contracts and form tolling agreements with gas suppliers.
The Magnolia project will require a combination of debt and equity to pay for the (initial) phase one costs – which have been estimated at over $US2 billion. The equity component has already been arranged.
For the debt component, LNG Ltd must approach a lender.
Before it can do so, however, it must complete the EPC contracts, get all the regulatory clearances and prove to the lender that it can in fact service and repay the loan.
It cannot repay such a large loan at the moment because it is not yet profitable (the two projects are three years minimum from production).
Therefore it needs binding tolling agreements. This mean it needs gas producers to guarantee use of LNG Ltd's facilities for a fixed period and for a fixed volume. These binding guarantees are bankable.
Today's announcement stems from a deal struck between Meridian LNG and Magnolia LNG.
LNG Ltd said Meridian "intends to progress the 20‐year liquefaction tolling agreement (LTA) with Magnolia, now that Meridian LNG has executed a 20‐year gas sales agreement (GSA) with E.On Global Commodities SE (a wholly owned company of E.On)."
This LTA will initially be for two million tonnes per annum (2mtpa) of LNG.
However LNG Ltd is targeting output of 8mtpa from both the Magnolia and Bear Head projects within the next decade.
Here's a quote directly from LNG Ltd's ASX Media Release: "We congratulate Meridian LNG on the signing of its Gas Sales Agreement with E.On and look forward to concluding negotiations and execution of the Meridian LTA…We are also pleased with the progress being made on additional tolling agreements, and LNG sales and purchase agreements and are confident we will close out the full 8 mtpa of Magnolia LNG production capacity."
Clearly, 2mpta could be just the beginning.
Should you buy Liquefied Natural Gas Ltd shares today?
Since I originally recommended readers buy LNG Ltd shares back in March 2014 the stock has jumped 1,000% higher. Whilst the risk-reward trade-off isn't nearly as good as it was back then, if LNG Ltd gets both it projects up-and-running its shares will be worth more than they are today.
However, if things don't go as smoothly as planned, investors can expect significant selling pressure because it remains a speculative punt – despite having a $2.3 billion market capitalisation!
