Expectations of war-driven US LNG buildout lift shares of project developers

LNG industry watchers on Wall Street are bullish on US export projects, which are benefiting from a robust demand outlook as war in Ukraine pivots Europe away from Russian gas.

The investment firm SL Advisors felt optimistic about US LNG projects headed into 2022 as global gas prices hovered around record levels and existing US export facilities ran at full bore.

SL Advisors, which focuses on midstream energy investments, reasoned that a tightening global gas market bolstered the prospects of US LNG projects, like NextDecade's Rio Grande LNG in Texas, securing the long-term contracts required to finance their projects, with not much LNG supply scheduled to come online by mid-decade, according to Henry Hoffman, a partner at the investment firm.

Russia's military invasion of Ukraine on Feb. 24 removed any doubt for SL Advisors that projects, such as Rio Grande, would get built, validating its more than 2% ownership of NextDecade's shares outstanding, Hoffman said.

"As soon as they invaded, in our minds, the project went to 100% certain," Hoffman said. "Europe is going to be moving away from Russia towards the US -- permanently."

Other investors showed similar confidence in the US LNG sector in the six weeks since Russia invaded Ukraine as share prices of publicly traded US LNG developers rocketed. NextDecade and fellow developer Tellurian have also disclosed fundraising efforts to federal financial regulators as they race to progress their export projects. Tellurian on April 7 reported entering a deal to sell another $200 million worth of common shares. NextDecade on the same day disclosed selling about $30 million that the company said it will use to develop Rio Grande, a project capable of producing up to 27 million metric tons of LNG that NextDecade expects to commercially sanction in the second half of 2022.

'A massive opportunity'

The investor sentiment has been supported by US and EU leaders' recent announcement of a cooperation plan to help Europe wean itself off Russian gas. The plan calls for EU leaders to work with member states "toward ensuring stable demand" for about 50 billion cubic meters of additional US LNG per year until at least 2030 and to "support long-term contracting mechanisms" to underpin new US LNG projects.

Goldman Sachs said Europe's efforts to replace gas supplies from Russia could see 3 Bcf/d to 5 Bcf/d worth of US LNG capacity get built beyond what the bank had forecast as its base case, equivalent to 20% to 33% of the EU's Russian gas imports.

Mizuho Securities USA estimated that the cooperation plan means North American LNG capacity "will need to more than double" by 2030 to balance global demand.

"This will create a massive opportunity for US LNG exporters vying to be part of a 'Third Wave' of projects to reach a final investment decision," Mizuho analysts said in an April 8 note to clients.

About 85 million mt/y of North American LNG capacity will need to be commercially sanctioned within the next three years, or about 11.5 Bcf/d worth of exports, Mizuho said.

'It takes the market time'

A string of offtake deals struck between US LNG developers and world buyers also fueled investor confidence, after many project sponsors struggled in recent years to build sufficient commercial support to advance new LNG facilities to construction.

NextDecade cited two offtake deals in recent weeks with Chinese buyers as signs of significant commercial progress. Energy Transfer recently announced a pair of long-term supply deals with Chinese buyers for its stalled Lake Charles LNG project in Louisiana. Tellurian is in financing talks, having said it has already secured the commercial support it needs to reach a final investment decision on its Driftwood LNG terminal in Louisiana by the end of April.

Other beneficiaries of an uptick in commercial talks have included Cheniere Energy, the country's biggest LNG exporter, and Venture Global, the privately held developer of the Calcasieu Pass LNG export terminal in Louisiana. Both developers have said they expect to reach final investment decisions soon on new LNG facilities.

The contracting blitz mostly involved counterparties in Asia. Market observers are waiting to see if European buyers will commit to long-term contracts, when they could be reluctant to make those commitments because of long-term demand risk associated with the EU's net-zero emissions goals. SL Advisors is among the investors who believe it is a matter of time.

"It takes the market time to shift to these things," Hoffman said. "But it has irreversibly changed direction."