Understanding Lake Charles
CS Comment, 08 August 2013
BG Group plc (BG.L)
Maintain Neutral with TP of 1190p: The DOE approves the export of up to
2bcfd (or ~15mtpa) to Non-FTA countries from Lake Charles; a largely
anticipated event with first LNG likely by late 1H19 now, in our view.
Timeline of events: FERC approval is still pending. We assume it takes two
years to get approval from the point of a full filing as a simple rule of thumb. BG
targets to complete the FERC application in Dec 2013, which means FERC
approval could be forthcoming by late 2015. The speed of FERC approvals will
be critical to the ramp up of US LNG exports. We then assume it takes the
project developers six extra months to reach FID or late 1H16. We assume
brownfield conversion takes 3 years to construct and green-fields 3.5 years or
first LNG from Lake Charles by late 1H19. BG previously stated it will develop
and operate the plant, but that it will not contribute capital to this project;
something that is possible in highly developed capital markets (eg US), where
various players are willing to participate in different parts of the value chain. BG
expects to be the majority off-taker, but not all (concentration risk), we think.
Implications for BG: the emergence of the US as a source of competitively
priced LNG supply for trading helps to somewhat lower the uncertainty on the
sustainability of BG’s trading business longer term. This is because its sources
of LNG supply have a finite life; between 2023-27 all of its existing/current
supply contracts (ex SP, QCLNG) will expire. Lake Charles adds to the supply
portfolio (helps to replenish), and gives comfort on the sustainability of its
trading model. That said, the risks associated with this supply are greater with
contractors not only having to (a) pay a 15% premium to HH versus contracting
at a discount elsewhere and (b) to commit to a higher capacity charge. On the
other hand, we believe there is little obligation to share margin upside from
diversion from this source allowing for greater upside when difs are wider.
Price: In the US, an abundance of low-cost supply leads us to conclude that
domestic gas prices will stay under $5/mmbtu. In Asia, we believe that the US
price effect will be to calm rather than capitulate the Asian price premium from
the current ~$4/mmbtu to ~$2/mmbtu. Taking a $1-3/mmbtu margin, Lake
Charles could make ~$1bn (mid-point of ~$500mn to ~$1.45bn) of EBIT to BG
at plateau (assuming 10mpta out of 15mpta off-take) in the early part of 2020s.
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Dominion Resources Inc (D)
Alert: Soft Quarter; Drop Down and Cost Cutting Key Items
6 August 2013 ¦ 7 pages ir.citi.com
New Drop Down Announced for Blue Racer: Dominion announced that it will
drop down TL-388 into Blue Racer in the fourth quarter 2013. With FERC approval
to sell TL-388 already received, we expect this pipeline to the Berne processing
plant to contribute $0.08 to earnings in Q4 2013.
Cove Point Update:
Dominion continues to expect that Cove Point will be the
second in line to be reviewed for non-FTA approval for its LNG export terminal.
DOE indicated that they will not conduct an additional study and has enough
information to consider further LNG export projects. With a DOE approval review
pace of approximately one company every 60 days, an announcement is expected
on Cove Point in 2-3 months. While we do not see reason for Cove Point to be
rejected, we note that DOE has discretion in this matter. Cove Point is proposed to
have 750mmcf/d of export capacity and is located relatively close to growing
production basins (Marcellus/Utica). If Dominion gets the green light, it would pave
the way for additional growth and would increase the argument for an MLP. While
management has decided against an MLP in the past, it continues to weigh on
investor minds.
Outlook for Blue Racer and Utica:
Dominion and Blue Racer continue to add
midstream infrastructure to support drilling in the Utica and Marcellus. To support
rapid growth in Utica drilling (387 wells vs 188 at 12YE), Natrium was placed into
service in May and Natrium II and Berne processing plants have been ordered. D is
well positioned to service the growing G&P needs as Utica permit numbers climb. |
