THE UNCERTAINTY OF LNG
Investors should take a closer look
Investors might be betting against LNG projects on Canada’s West Coast coming to fruition, but since there is no shortage of ways to play them, those with a little faith that some projects will get built should at least consider them.
One group that could see the biggest impact is accommodation providers. Black Diamond Group Ltd., Horizon North Logistics Inc. and WesternOne Inc. have proven to be sensitive to LNG- related news flow, yet analysts at Raymond James note their share prices don’t appear to reflect any positives from potential projects.
They noted Black Diamond and Horizon North are trading around one multiple point below their three- year averages, based on estimates that don’t include incremental LNG business.
The analysts also highlighted earthmoving equipment and service providers with exposure to the Petronas LNG project in B. C. and others in the region.
“Interestingly, the market hasn’t overwhelmingly reacted to LNG-related news flow through these stocks,” Raymond James said in a report.
This makes sense for companies such as Finning International Inc. and Wajax Corp., since LNG developments wouldn’t be major “needle- moving” events for them or their share prices. However, the analysts said the lack of significant movement for a name like North American Energy Partners Inc., which they believe could materially
There are plenty of opportunities for domestic companies to secure contracts around pipeline work.
benefit from LNG development, is a market “inefficiency.”
Another group that hasn’t noticeably moved on LNG news is construction.
“This despite our fundamental view that there are plenty of opportunities for domestic companies to secure contracts around pipeline work, the construction of port facilities and related civil infrastructure facilities,” Raymond James said, with Aecon Group Inc. and Stuart Olson Inc. as favourites.
There are 19 projects proposed for the West Coast, but none of their backers have made a firm decision to proceed. The outlook for B. C.’ s nascent LNG industry has been clouded by low commodity prices and competition from projects elsewhere in the world that are further along.
“It’s unlikely in my view that most of the LNG projects that are currently proposed will get built,” said Alan Ross, a lawyer with Borden Ladner Gervais in Calgary who has worked on behalf of LNG clients. “There’s an awful lot of proposed LNG projects and simply not enough need for all of them.”
This explains why many investors are heavily discounting the potential for LNG.
But Petronas’s Pacific North-West LNG is waiting a favourable decision from the Canadian Environmental Assessment Agency, something Raymond James believes could be ready within the next two to three months. The decision is considered one of the final hurdles Petronas needs to clear before making its final investment decision.
“So if a positive FID is going to affect certain Canadian supply and service stocks, it could happen relatively soon,” Raymond James analysts said, noting they believe the odds of it are better than 50 per cent. And since it looks like the market is pricing in a probability of near zero, “any odds are good odds.”
Raymond James’s estimates the LNG- related stocks it covers don’t include any LNG- related business and they are trading within standard multiple ranges.
“This creates an interesting opportunity for investors to selectively buy equity in companies based on their investment merits sans LNG, but asymmetrically benefit should an integrated LNG project proceed,” they said.