A few months back, at the beginning of March to be exact, I told investors to buy Liquefied Natural Gas Limited (ASX: LNG) ("LNGL"). In the article posted on fool.com.au I said: "Currently priced around $0.33 per share, I will not be surprised if it trades above $1.00 within 12 months, with further upside potential likely."
LNGL is (now) a $560 million company involved in the USA's booming LNG market. Since its proposed Fisherman's Landing export terminal in Gladstone was halted, management's attention has focused on the development of its flagship, Magnolia, 8 million tonne per annum (mtpa) LNG liquefaction export facility in Lake Charles, Louisiana, USA. Financial close for this uncertain project is expected mid-2015.
At lunchtime today, just over three months after I chose it as my top stock pick, it's up 403% versus a gain of just 0.64% from the S&P/ASX 200 (ASX: XJO) (^AXJO), a loss of 11% from Rio Tinto Limited (ASX: RIO) and 6% decrease from BHP Billiton Limited (ASX: BHP). The next graph shows its return.
Source: Google Finance
This raises a few questions for potential investors:
Can it continue?
Nobody can guess where the market will take its share price in the short term. The biggest driver behind its recent rally can be attributed to the U.S. government's decision to streamline approvals for LNG export facilities to overseas customers, in an attempt to challenge Russia's LNG move on China.
Is it risky?
Yes. LNGL is yet to form any bankable tolling agreements with its major partners (although these now appear more likely) and there are many other significant hurdles which must be passed before management can secure funding for the proposed 8mtpa facility. However, management have experience from the Fisherman's Landing project in Gladstone and are capable of taking Magnolia to first production, if the stars align.
What about valuation?
LNGL's share price has now risen more than 800% in the past 12 months and, as noted earlier, its current market capitalisation is $560 million. With no commodity risk the first phase of the facility (which has only 4mtpa capacity) is forecast to be able to drive EBITDA to around $US377 million per annum. For the proposed 8mtpa facility that figure goes as high as $US760 million per annum.
In addition, the market currently places a value of around $500 million, per million tonnes of LNG output and, in the long-term, the company will be able to drive revenues from its innovative OSMR liquefaction technology which has the ability to reduce capex and opex by 30% on similar LNG facilities.
The next resources boom
LNGL could be at the beginning of a major run-up in share price thanks to the US government's recent decision to streamline approvals. However, its current increases are not sustainable. Therefore I believe, once the fear of missing out subsides, it'll have to increase at a much slower rate or trend sideways for a considerable period of time as the market begins to realise the Magnolia facility will not deliver first production until 2018. In addition, profit taking is likely to occur and put downwards pressure on the share price.
