NFE reported a 2Q19 $10MM negative operating margin due to a 2018 LNG cargo purchase (made at significantly higher prices than today’s market) rolling off. Longer term, the company is targeting $5.50/mcf average LNG acquisition cost compared to >$10/mcf in 2Q19. 3Q19 margins aspire to a positive $48MM as Old Harbor volumes ramp, even though average LNG procurement costs will remain above the long-term goal. NFE is short 27 LNG cargoes providing runway to average down procurement price within the <$5/mcf spot LNG environment.
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The EIA’s weekly adjustment factor was a cumulative 11.8MM bbl in June reports, inclusive of last week’s major inventory draw that was primarily driven by lower than expected imports. The cumulative adjustment was down from May’s 22MM bbl, tracking our methodology of the ratio of Rystad’s completions count against the Baker Hughes oil rig count. As a reminder, since the EIA’s modeled production number is driven by the rig count, when the trajectory of completions (on a two month lag) disperses from the trajectory of the rig count, it is likely to lead to oil supply unaccounted for, expressed through the “adjustment.”
We believe a data driven approach can clarify OPEC priorities and intentions because the data we use is a proxy for the data they use, and we can thus attempt to infer their conclusions and objectives. We believe recent data points suggest that Saudi Arabia is likely to continue to curtail production aggressively through year end, however there are signals that the production quota might lose efficacy in 2020, and that OPEC+ could fail to agree on the correct approach, endangering coordination. Three risks are emerging signifying vulnerability of existing OPEC+ policy.
We expect the EIA to report a 1.4MM bbl crude inventory draw for the week ended 5/24. This is slightly stronger than consensus’ 0.7MM bbl draw. Our number assumes moderately lower net imports and stronger refinery runs w/w, plus we are incorporating the trailing 4-week average supply adjustment (+0.4MM bpd).
GLNG reported an adjusted net loss of $42MM vs a consensus net loss of $24MM and our $16MM net income estimate. TCE realizations of $39,000/day were lower than our estimate and explain the variance, with management citing weather and capacity related spot LNG market weakness as a weight on freight markets. Importantly, the company announced that the board has authorized a spin out of the shipping business (excluding two more modern vessels, one of which is marked for FSRU conversion). A separation of the growth (FLNG/FSRU/Golar Power) from the shipping business, unencumbering the growth business from legacy debt, is a long-awaited catalyst which we believe is positive for GLNG shares.
PA Liquefier Still in the Plan – While PA liquefier project was de-emphasized somewhat in the mgmt presentation of 1Q19 results as the focus is on progress in terminal commitments and expanding margins on committed LNG sales volumes, we are leaving the PA liquefier project in our base case valuation on NFE, which calls for 4.5MM gal/day of LNG sales, production from the 3.5MM gal/day liquefier, and 1MM gal/day of 3rd party LNG volumes for sale. Management noted financing was the hurdle to FID of the PA liquefier, and we believe as the core terminaling business ramps and generates EBITDA, financing for developing vertical integration on LNG sales will open up.
We expect the EIA to report a 1.3MM bbl crude inventory build for the week ended 4/19, above consensus’ 0.5MM bbl build. We attribute the build primarily to an increase in imports w/w. That should be tempered somewhat by higher exports, but we see refinery utilization essentially flat at just 88% (-5% y/y).
Near term crude prices could be topping out as liftings increase out of the Arabian Gulf as well as non-OPEC Latin America and Russia. Full data analysis is inside this note, but from a high level we expect data-watchers to get nervous about supply in the coming weeks, as pent up liftings from deeper than expected 1Q production cuts hit the market.
We are combining 1Q19 earnings preview and post-earnings tactical thought piece for IOCs and Refiners because Downstream fundamentals are materially influencing quarterly IOC earnings variance. 1Q19 headwinds to refining margins are well understood by Refining investors and we believe reporting sequentially down 1Q results within an environment of positive 2Q momentum could lift an overhang on the sector. IOC impacts from Downstream could be more of a surprise, but we believe the improved current margin environment could be highlighted on conference calls to positive effect.
We are upgrading NEXT shares from Underperform to Peer Perform. Our conclusions and drivers are discussed in detail in an industry update also published today, linked HERE. In this note, we republish the accompanying model update with assumptions listed, as well as discuss key milestones for the company.
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