? The 25% steel tariff would have made three-train Freeport LNG project 3.5% to 5% more expensive.
? Freeport still looking to 20-year contracts for expansion project.
? Private developer has no plans to go public and calls some upstarts "PowerPoint companies."
Michael Smith is the billionaire chairman and CEO of Freeport LNG, one of four liquefaction and export terminals under construction in the U.S. The oil and gas veteran got his start in the LNG business on the import side after selling his Basin Exploration Inc., a Colorado-based exploration and production. After hydraulic fracturing, also known as fracking, opened the way to abundant U.S. shale gas, Smith followed Cheniere Energy Inc. in developing a much more capital-intensive LNG export project. The Freeport LNG project on Quintana Island, Texas, is the only project under construction not backed by a publicly traded company. The initial three trains are expected to enter service over a period that spans from late 2018 throughout 2019, and Freeport hopes to move forward with a fourth train. S&P Global Market Intelligence sat down with Smith at CERAWeek by IHS Markit in Houston. The following is an edited transcript of that conversation.
Freeport LNG CEO Michael Smith. |
S&P Global Market Intelligence: You first got involved in Freeport when you made an investment to develop an import terminal. What do you think when you look back at where that has taken you?
Michael Smith:
Fortunately, we've kept a very conservative profile. We didn't expand without having customers. ... Wall Street gave [Cheniere] the money to double their facility and create Cheniere Marketing without any customers — "build it and they will come" — and they took on an extra billion-one, billion-two in debt. There was nobody who came, so their stock went to $2 or $3 and they were close to bankrupt. Our debt remained investment grade the entire time until we paid it off and started construction of the liquefaction project in 2014 ... We didn't take that risk.
We used that same model for liquefaction. We have five great customers who signed 20 years. We think this time they're going to use the facility. It's a different magnitude. The regas cost a billion dollars to build, and this one is a $13 billion project. We charged 35 cents an Mcf, and this is in the $2.75 to $3 range. I pinch myself sometimes at how well it's going.
What are the challenges of being the only LNG project under construction not backed by a public company? Are there any advantages to being private?
As a private company, we didn't have to go through any of the depressing part of looking at a stock price. It didn't matter. We had a solid business — we just couldn't get it to expand ... Without an expansion, we didn't need any capital. So we were fine.
Being public, however, once we wanted to start liquefaction, was a big advantage to Cheniere. I tip my hat to them. They're the ones that started liquefaction — all the credit goes to them. They came up with a great solution, which I wasn't first on. We followed them right away.
They, however, even with a terrible balance sheet, were able to access the capital markets for equity and debt very easily. As a private company, we were not. It wasn't available for us. It would have been punitive for us to try to do anything very quickly. That's the big difference. We were very fortunate that we were able to raise the capital that we did with so little dilution to the stakeholders. It wasn't in our business plan that we could have done it so well.
Some developers have looked to gain access to capital markets for LNG export projects using things such as a reverse merger. Is going public, either via reverse merger or an IPO, something you're considering?
Not a chance. First of all, some of them — I like to call them "the PowerPoint companies" — they have an idea and that's it. They have a piece of land and an application with the government. Some of them have agreements with off-takers, some really big off-takers, but their prices [for LNG] to get them to sign are so dismally low that I don't believe they can be built. They can't make a profit.
I don't need someone else to tell me what they think they can build it for. I know what it costs to build this, and small-scale modular does not save hardly any money, if anything, on your first 8 million tonnes of capacity. You need the same dock and couple of storage tanks and pipelines and unloading lines and control room that we do. It just isn't that cheap to be able to build it at that price. But if they can raise the capital — an outrageous amount of equity for no return or negative return — with the hopes that once they get that done they can raise their price to something that makes a profit on what would be equivalent to my third train, maybe they can do that.
Almost all of our debt is fully amortized. There is no reason we'd do a reverse merger to go public. If we were to ever go public — and there's nothing on the horizon — we'd be raising $1 billion or $2 billion, and we'd have a $10 billion market cap, not a reverse merger to try to get the back-door way to capital. When I was at their stage, maybe I would have done that to get me off the ground, but we're just a different animal now ... We have no problem staying private and raising the debt capital from our company to do train 4 without bringing in a dollar of equity.
There has been a lot of talk about how predictions of an LNG oversupply were overblown and that the market actually risks heading into a period of undersupply if final investment decisions are not made. Do you agree with that characterization?
Absolutely. It could get ugly before it calms down for a brief period of time, but if that does happen, it's a fraction of how bad it was projected to be two years ago. It's clear to me that after 30 or more years in the energy business that the curves are going to cross. It's just a question of when.
Are you looking to sign shorter contracts in response to buyers' calls for more flexibility?
Nope. We still need long-term contracts. The model hasn't changed. There may be some possibility of something moderately shorter, but it would make it very difficult. I know [Tellurian Inc.] has talked about some shorter instruments, and maybe they can. I know what works, and I know what risks we're willing to take. I don't think the banks will take the risk for much shorter. I don't have an interest.
When you're looking to contract out the train 4 expansion, which markets are you targeting?
Asia and Europe. We're focusing more strongly on Asia. We are having conversations with some markets in South America and Central America that would be smaller pieces of the pie.
We woke up Friday morning, and if steel prices are 25% higher, everybody's proposed LNG terminal just went up 3.5% to 5% in cost. LNG terminals are steel. I've got 190 miles of pipe in my terminal — steel or aluminum. Specialty steel. Expensive steel. We have seven Eiffel Towers' worth of structural steel to hold that pipe in place. We have 600 acres filled with pipe racks of steel. It's going to cost a couple hundred million dollars more to build our facility if we were to contract it out today.

