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).
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.
Earlier this week, RDS agreed to a 2MM tpa sale and purchase agreement (SPA) with NEXT. Separately, TOT agreed to contribute $500MM of equity (entitling TOT to 1MM tpa of capacity) to TELL’s Driftwood project, along with a 1.5MM tpa offtake agreement from TELL’s own equity position in Driftwood. These announcements reflect 1) an improving LNG macro view among IOCs; 2) ongoing shift in new LNG offtake toward portfolio players and away from point-to-point sales to end users; 3) global attention on Waha gas prices, which have turned negative and support sentiment around US LNG.
NFE hosted a business update call this morning (03/18/19). We believe the call was positive and are leaving our base case 4MM gal/day by 2021 unchanged, driving a $20 valuation. The stripped down 2.5MM gal/day, no liquefier case ($240MM annual CF) the company presented to illustrate earnings power with no incremental commercial developments helps in understanding a fully burdened downside scenario, but its not a driver for our assumptions and we’re still using 4MM gal/day of LNG terminal sales (supporting a 3.5MM gal/day liquefier) as a Phase 1 base case, with upside from there as the company converts on 14.4MM gal/day of potential volumes in the pipeline.
EIA Preview (Page 2): We expect the EIA to report a crude inventory build of 3.1MM bbl for the week ended 3/8/19. Relative to the larger than expected 7.1MM bbl build last week, we expect net imports to be down and refinery throughput to be up. We believe the EIA has possibly been overstating weekly crude exports, flowing through a persistent positive “adjustment”, which last week was 0.7MM bpd. In our model, we remove the adjustment and use our lower crude export forecast vs the EIA trend.
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