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The Liquefied Natural Gas share price is down 52% this year, is it a buy?

The Liquefied Natural Gas Limited (ASX: LNG) (“LNGL”) share price has more than halved since the start of this year, although shares have risen 0.9% or 1 cent today to $1.19.

The major factor playing havoc with the share price is the falling US WTI benchmark oil price, which slipped below US$40 a barrel overnight. Oil is in a state of massive global oversupply after thousands of shale oil and gas wells were brought online over the past few years, particularly in the US.

The global LNG market is also expected to be in oversupply as 15 processing ‘trains’ have recently been completed in Australia and Papua New Guinea from the likes of

Despite the soaring number of drilling rigs sidelined, oil prices continue to fall, with oil companies focusing on the most productive fields and lowering production costs substantially.

For LNGL, all this has major consequences. On the up side, it’s likely to reduce their input costs (buying gas from US suppliers) for its under-development Magnolia LNG export processing plant, as well as its Canadian Bear head LNG project.

The problem is that falling oil prices will impact on gas prices, which are usually linked to the underlying oil price. That could see forecast revenues plunge and make both LNG projects commercially unviable.

Already oil and gas producers UK-listed BG Group, Brazil’s Petronas and US-based Excelerate Energy have all reportedly deferred plans for LNG projects, with Excelerate stating that its project no longer met its financial criteria necessary to move forward.

AS international LNG prices fall, the economics of exporting North American gas into global markets worsens, and could eventually mean that US LNG exports are commercially unviable.

LNGL has also failed to hit a number of milestones for its Magnolia LNG project, and a number of milestones have blown out. The US$4.35 billion engineering, procurement and construction (EPC) contract recently signed with KBR-SKE&C joint venture was originally targeted for the fourth quarter of 2014 according to fund manager, Totus Capital.

LNGL still needs to sign legally binding tolling agreements for 75% of Magnolia’s 8 million tonnes per annum (mtpa) capacity, with just a 2 mtpa agreement with Meridian LNG so far.

Foolish takeaway

LNGL is looking increasingly less likely to get its flagship Magnolia project into development, let alone any of its other LNG projects. Unless the company can show some solid progress, the share price could slide ever lower.

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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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