This morning, I read an announcement from Liquefied Natural Gas Ltd (ASX: LNG) which read:
Magnolia LNG, LLC, LNG Ltd's Louisiana-based subsidiary "has signed a legally binding agreement with Meridian LNG Holdings Corp (Meridian LNG) for firm capacity rights for up to 2 million tonnes per annum (mtpa) at Magnolia LNG, located on the Calcasieu shipping channel in the Lake Charles District, State of Louisiana, USA."
For those familiar with the goings-on of LNG Ltd, this is a significant announcement.
Magnolia LNG is the original of two proposed liquefaction facilities in North America, owned by LNG Ltd. Essentially, the facilities will turn natural gas into liquid, to make transportation more economical. Phase I of the project was estimated to cost more than $US2 billion, and would deliver 4mtpa (million tonnes per annum) capacity. Phase II, taking it to 8mtpa capacity, would take the total cost to $US3.5 billion.
To fund the project, LNG Ltd requires 30% equity funding (from Stonepeak Partners) and a further 70% will be debt funded. To get the debt funding, however, LNG Ltd would need to reach financial close.
That means, having binding tolling agreements in place with suppliers of the gas.
Magnolia already has tolling agreements in place to cover nearly all of the 8mpta, but it needs binding agreements with each of the suppliers. Today's agreement with Meridian is the first such arrangement.
It's a 20-year contract, with the option of a five-year extension; has a firm annual capacity of 1.7mtpa, with an additional 0.3mtpa at Magnolia's discretion; and is subject to conditions precedent – such as Magnolia reaching financial close by no later than 30 June 2016.
I'd previously warned that if LNG Ltd, or Magnolia, failed to deliver on its previous target of achieving financial close by mid-2015, its shares may be sold off.
LNG Ltd shares are down more than 10% at time of writing.
Still, despite news that financial close might be coming later than expected, I find little reason to justify today's selloff from the announcement.
The CEO, Maurice Brand, said: "Financial close for the Magnolia project is planned for first quarter 2016…The Magnolia project remains on schedule to provide first LNG in December 2018 with full LNG supply of 8 mtpa completed in 2019."
Are Liquefied Natural Gas Ltd shares set to take off?
As I've written before, LNG Ltd's potential is no secret. Indeed, despite boasting a market capitalisation of $1.9 billion, it is yet to produce any meaningful sales or cash flow. Therefore, given its current valuation, I'd advise investors to hold off buying in for now.
