The entry of a new set of players in US liquefied natural gas (LNG) export projects has highlighted the importance that funding issues can have on sponsor credit, according to a new Fitch Ratings report released Tuesday.
Traditionally, LNG projects have been dominated by supermajors and national oil companies (NOCs) -- entities whose generally very high credit quality and low net debt allowed them to fund large, multiyear projects with relative ease.
By contrast, a newer set of players has begun to participate in such projects in North America, including large independent exploration and production (E&P) companies, utility/pipeline companies, and master limited partnerships (MLPs), with different credit profiles. Fitch believes that over the long run, LNG facilities could become a particularly attractive source of growth for larger MLPs.
LNG export facilities typically take four to five years to permit and build, with costs incurred before cash is generated. For MLPs which rely on growing distributions to maintain their unit price, the long-term benefits of a well-structured project are balanced against these large financial commitments which may not pay out for an extended period.
Some of the financial strategies MLPs may use to balance these considerations include: avoiding higher cost greenfield projects, keeping investments at manageable sizes through phased-in projects and joint ventures (JVs), and minimizing construction cash outflows.
Development of US LNG facilities to accommodate the boom in domestic shale production is becoming a reality, although political and market factors could pose a challenge for their completion.
Eight of the nine onshore LNG export facilities in the lower 48 state are at some stage of development, with several greenfield projects also proposed. However, political opposition, long lead times to permit and build, high construction costs, and rising interest rates pose risks for these facilities being completed and/or new facilities started.