Betting On Gas With LNG
In March we wrote about start-up Liquified Natural Gas (LNG) exporter, NextDecade (NEXT) (see Making LNG Cleaner). As with Tellurian (TELL) and Cheniere (LNG) before them, NEXT needs to sign up buyers of its LNG before obtaining the financing to complete the liquefaction infrastructure. The rolling global energy crisis which has seen European and Asian buyers paying over $35 per Million BTUs (MMBTUs) for shipments has improved the outlook for US LNG exports. The $25 per MMBTU regional difference with US domestic prices is testament to the constraints posed by limited LNG export capacity. NEXT aims to partially solve that – foreign buyers are eager, although US customers will wind up paying marginally more as increased exports push up prices.
French utility Engie pulled out of discussions with NEXT late last year because they were unhappy at buying Texan natural gas given the prevalence of flaring. Regulators in Texas have interpreted their oversight of methane flaring very broadly, with the result that flaring permits are routinely granted. In 2019 a dispute arose between Exco, a natural gas driller, and Williams Companies over Exco’s application to flare natural gas rather than pay the tariff Williams demanded for pipeline transportation (see Texas Reconsiders Flaring). It showed how Texas’ ready approval of flaring had abandoned the original intent, which was to allow the flaring of associated gas where no infrastructure existed in order to allow crude oil production. Williams argued that the natural gas infrastructure was available, but that Exco didn’t like the price. In September, a judge ruled in Williams favor but that may not be the conclusion.
European LNG buyers are likely to share Engie’s sensitivity to how their product is produced, so NEXT created a “carbon solutions” unit to capture the CO2 associated with their LNG activities. Last week SL Advisors partner Henry Hoffman chatted with management during Cowen’s 2021 Energy Summit.
We think NEXT is under the radar for most investors. They do have some sell-side coverage though. Credit Suisse raised them from Neutral to Outperform in March, which gave the stock a boost. The company has a firm offtake deal with Shell to deliver 2 million tons per annum (MPTA) of natural gas for 20 years. NEXT needs agreements on 9 MPTA more in order to fully sell out capacity for Phase 1 of their proposed Rio Grande facility in south Texas. They are optimistic that they’ll reach this goal next quarter, reporting discussions on volumes well in excess of what’s needed.
The Administration’s Build Back Better legislation, which is currently with the Senate, may boost revenues at Next Carbon Solutions if the CO2 tax credits are sufficient to stimulate additional demand for the new unit’s services.
NEXT is aiming to provide “green” methane, whose production is certified to have resulted in minimum methane leaks along with the capture and sequestration of the CO2 generated in its processing and eventual liquefaction for transfer to LNG tankers.
Henry Hoffman also held discussions with Tellurian’s (TELL) management. TELL’s founder and CEO is Charif Souki, whose weekly Youtube videos have developed a following among retail investors. We like TELL too, but Souki has an unpredictable, risk-seeking streak. He was forced out of Cheniere by Carl Icahn who opposed Souki’s plans to expand into natural gas trading. Why complicate a business with years of cashflow visibility not exposed to natural gas prices?
Last year Souki suffered a margin call on his personal holdings of TELL when the stock collapsed during the Covid rout. He has a healthy risk appetite. We also didn’t like the August secondary offering which was done at a substantial discount to the prevailing price. TELL has a business model that incorporates exposure to LNG prices, which is probably making it harder to finance but allows greater upside if LNG prices remain firm, as Souki believes they will.
TELL told us they were in discussions with private equity investors, which we think could be good as it will improve corporate governance, and get the company closer to having enough financing to begin construction of their LNG facility.
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Natural gas remains the most impactful way for the world to lower emissions, by reducing reliance on coal. Recently an overly hasty effort to transition to renewables in Europe has exposed weaknesses in their energy strategy and created further demand for natural gas. Although $35 per MMBTU is likely unsustainable, the long term demand for LNG is clear.
NEXT and TELL both offer the opportunity to invest in continued global demand growth for natural gas. We are invested in them.
We have three funds that seek to profit from this environment:
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