What: The Liquefied Natural Gas Ltd (ASX: LNG) share price soared more than 10% this morning, joining a chorus of mid-cap oil and gas producers, such as Sundance Energy Australia Ltd (ASX: SEA) and AWE Limited (ASX: AWE), to be among the S&P/ASX 200's (Index: ^AXJO) (ASX: XJO) top movers.
So what: Shares of LNG Ltd, a prospective US liquefied natural gas tolling and export facility owner, went on a wild ride in 2014 — soaring more than 1,400% — but the sunk more than 64% in 2015 as oil prices plummeted.
Now what: The company's intention is to connect its facilities to shale oil networks in the USA. The facilities turn natural gas into LNG to compress it for storage and transport. Then, it will export the energy sources to lucrative international markets.
While LNG Ltd carries no commodity risk, it merely charges a fee per unit for conversion of gas to liquid, it needs to secure guaranteed customer contracts for its projects to remain feasible.
Unfortunately, given crude oil prices have fallen from over $US108 per barrel in June 2014 to around $US40 per barrel today, many high-cost US oil producers are feeling the pinch. Moreover, they are likely contemplating curbing output and scrapping expansion plans.
Being unable to secure the guaranteed supply from producers, LNG Ltd will have a tough time proving its business plan to creditors, whose money it'll use to build its projects. Therefore, LNG Ltd shares are a high-risk investment proposition and not appropriate for risk-averse investors at this time.
