Throughout 2014 shares in prospective LNG export facility owner, Liquefied Natural Gas Limited (ASX: LNG) ("LNGL"), soared more than 700% and was the best performing stock in the S&P/ASX 200 (ASX: XJO) (INDEX: ^AXJO).
In the past two days however its shares are down nearly 10%. Giants BHP Billiton Limited (ASX: RIO) and Woodside Petroleum Limited (ASX: WPL) are also nursing heavy losses.
Whilst LNGL is not yet profitable, shareholders have been eagerly awaiting any positive news on its Magnolia facility in Lake Charles, Louisiana, USA. The facility, which will convert gas to liquid for transportation by ship, is currently in the design stage.
The original EPC (Engineering, Procurement and Construction) contract with Korea's SK E&C Group has already been revised and updated by legal, financial and technical consultants for a 4mtpa (million tonnes per annum) facility. However, the Magnolia project was designed to become an 8mtpa facility.
Yesterday, LNGL announced it had executed a Technical Services Agreement (TSA) with Kellogg Brown and Root LLC (KBR) to undertake cost verification and provide other services supporting the Magnolia projects delivery.
KBR is a global leader in LNG production capacity, having been involved in around one-third of the world's current production. SK E&C and KBR will work together to complete scopes of services under their respective TSA agreements.
In the coming month, a memorandum of understanding (MOU) between Magnolia LNG – LNGL's fully owned subsidiary – and SK E&C and KBR will be established. Between now and the end of March, all groups will work on the costs and timing of an expansion to an 8mtpa facility.
MLNG will also be able to incorporate comments received from the Federal Energy Regulatory Commission, "during the preparation of the Draft Environmental Impact Statement, and to undertake the necessary rigorous planning and scheduling required to support achieving first LNG in 2018," MLNG's Chief Operating Officer, John Baguley said in an ASX announcement.
Should you Buy, Hold or Sell?
In the past two days, LNGL shares have followed the oil price lower. Whilst LNGL's two projects, Magnolia and Bear Head LNG (in Nova Scotia, Canada) will not be exposed to commodity risk once in operation (they'll simply charge a flat fee per unit), the company needs to form bankable tolling agreements with major energy producers before it reaches financial close. Meaning before it applies for funding, it needs gas producers to confirm they will use LNGL's services.
Falling oil prices has raised concerns however that cheap shale gas from North America will no longer be able to compete with existing supplies in the key growth markets throughout Asia, where prices are linked to oil. This creates uncertainty over LNGL's ability to turn non-binding tolling partners into binding tolling partners.
Some analysts believe oil prices of around $US60 per barrel make North American LNG shipments uneconomical in Asia. However, in The Australian Financial Review yesterday, LNGL CEO Maurice Brand played down concerns over the fall in oil prices, "We have enough interest to certainly move forward with Magnolia and now we have good solid interest in Bear Head as well."
"Obviously price will come under some pressure over time," he added, "but the cost of the gas feedstock is still extraordinarily attractive even if you take in account the extra cost of shipping LNG."
I sold over half of my holding in LNG in 2014 because its share price had run very hard. Even with the latest selloff in share price however LNGL continues to be a high-risk/high-reward stock pick.
For buyers, perhaps leaving it on your watchlist and waiting to see how the next six months plays out (until it reaches financial close) mightn't be such a bad idea. You might miss some gains, but heck, you might save some money as well.
