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Liquefied Natural Gas share price recovers: Is there more to come?

Credit: commons.wikipedia.org

Liquefied Natural Gas Limited (ASX: LNG) share price has risen 0.9% to $1.17 in lunchtime trading, recovering some of the recent falls.

The company’s share price has dropped more than 60% in the past 12 months, including 25% in the past month alone. Today’s surge is most likely due to a recovery in benchmark oil prices overnight.

Brent Crude Oil gained 0.3% overnight to trade at US$44.79 a barrel and is up a further 0.4% today at US$45.17 a barrel.

Investors appear to have taken the small gain as a sign that further falls are unlikely, with comments from the Saudi Arabian minister for petroleum and resources Ali bin Ibrahim Al-Naimi that the world’s largest exporters were willing to cooperate with OPEC in an effort to stabilise prices.

Crude oil prices have fallen more than 40% in the past year after OPEC vowed to maintain its production above 30 million barrels a day – despite a glut of oil supply.

Liquefied Natural Gas Ltd (LNGL) is attempting to develop a liquefied natural gas (LNG) processing facility to export US gas to foreign customers. The problem is that falling oil prices could make the project unprofitable, or at least temporarily delay funding for the construction. LNGL has signed an engineering, procurement and construction (EPC) contract costing US$4.35 billion (A$6.12 billion) to build a four train facility with a total capacity of 8 million tonnes per annum (mtpa).

That’s substantially more than the initial estimate of a total cost of US$2.2 billion for two trains, including US$1.57 in EPC costs the company provided just over a year ago.

US oil prices have slipped even further than Brent Crude, thanks to a glut from shale oil drilling, but since oil prices have plunged, the number of drilling rigs has dropped from a peak of above 1,500 to around 574, and still appears to be slowly declining.

The problem the oil industry faces is that if Saudi Arabia and other OPEC oil-producing countries cut back on their production, prices will rise and could encourage US oil drillers back into action, thereby putting more downward pressure on the oil price.

Foolish takeaway

LNGL has some heavy hitting shareholders backing the company including renowned value investor Seth Klarman’s Baupost Group, Valinor Management, Claren Road and Fairview Capital.

It would be difficult to bet against them, but the company has hit some speed bumps achieving a number of major milestones, which could see the project delayed and end up over budget. Recent share price falls would pale into insignificance if that happens.

 

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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