{"id":1127497,"date":"2019-07-17T11:01:50","date_gmt":"2019-07-17T16:01:50","guid":{"rendered":"https:\/\/oilandgas-investments.com\/?p=31537"},"modified":"2019-07-17T11:01:50","modified_gmt":"2019-07-17T16:01:50","slug":"this-tiny-canadian-company-will-replace-russian-natgas-in-germany-really","status":"publish","type":"post","link":"https:\/\/juniorminingnews.com\/?p=1127497","title":{"rendered":"This Tiny Canadian Company Will Replace Russian NatGas in Germany \u2013 Really!"},"content":{"rendered":"

A PEA-sized Company with a Huge Natural Gas Vision<\/strong><\/p>\n

What do you make of a $70 million company developing a $10 billion project?<\/p>\n

Well that is exactly what we have in the case of tiny, Calgary based Pieridae \u2013 trading under symbol PEA-TSXv.<\/p>\n

Its an uphill battle, but I have to admit the company is giving it their best shot.\u00a0 After you’re done reading, you’ll realize it’s not as far-fetched as you think.<\/p>\n

Goldboro LNG<\/strong><\/span><\/p>\n

Pieridae is working toward the development of the Goldboro liquified natural gas (LNG) project in Nova Scotia on the Atlantic Ocean.<\/p>\n

The Goldboro terminals will be located 250 km NE of Halifax.\u00a0 It will be made up of a 5 to 10 million tonnes per annum (mmtpa) liquification and loading facility, depending on the final design decision.<\/p>\n

\"1\"<\/a><\/p>\n

For comparison, Shell\u2019s LNG Canada project is for 14 mmtpa.<\/p>\n

But unlike LNG Canada, which has Shell, Petronas, PetroChina, Mitsubishi and KOGAS all with stakes in the project, Goldboro is 100% owned by tiny little Pieridae.<\/p>\n

If that\u2019s not enough chutzpah for you, Pieridae plans to run not just the terminal, but the upstream assets as well.<\/p>\n

It would all seem perfectly implausible if the deal didn\u2019t have one large backer with a significant interest in seeing the project being built:\u00a0 The German government.<\/span><\/p>\n

The LNG from Goldboro will be shipped across the Atlantic.\u00a0 Almost the entire first train of the project (about 4.8 mmtpa of a total of 5 mmtpa) will be delivered to German utility giant Uniper<\/em>.<\/p>\n

Uniper is the largest utility in Germany.\u00a0 They buy 40% of the natural gas consumed in Germany today.<\/p>\n

Their contract with Pieridae, which has a 20 year take or pay term, will be for 10% of overall German gas demand \u2013 that’s HUGE!<\/p>\n

Germany is desperately looking to diversify their gas supply.\u00a0 Right now, 60% of their natural gas imports come from Russia, which isn’t a safe source of supply (ask Ukraine).<\/p>\n

Natural gas is deemed a \u201cscarce commodity\u201d essential for the German economy, which means that imports qualify for the export credit assistance programs.<\/p>\n

With Goldboro being a large natural gas importer, it qualifies for Germany\u2019s \u201cUntied Finance Credit\u201d (UFC) program, where the German government guarantees loans for a very big part of the project cost.<\/p>\n

The first train of the facility would qualify for a US$3 billion loan guarantee under the program.\u00a0 That\u2019s HUGE!<\/p>\n

In addition, Pieridae will qualify for another US $1.5 billion of loan of guarantees for upstream development of natural gas assets.<\/p>\n

All told US $4.5 billion of the US $6 billion expected costs will be guaranteed.<\/p>\n

What was implausible becomes more plausible.<\/p>\n

Of course, Pieridae still needs to go out and find a commercial lender willing to fork over the $4.5 billion of funding.\u00a0 But that is a lot easier (and cheaper) when the loan is backed by the German government.<\/p>\n

To be sure, there are hurdles that remain.\u00a0 Before a lender will commit to such a tidy sum, they want to know the costs in detail.\u00a0 This is where we are at now.<\/p>\n

Pieridae has hired Kellogg, Root and Brown (KBR) to perform an engineering and design study that will include a lump sum estimate of project costs that can be used by prospective lenders.<\/p>\n

That study \u2013 expected to be completed early in 2020 \u2013 is really The Next Big Milestone for Pieridae.<\/p>\n

Own the Stream<\/strong><\/span><\/p>\n

In June Pieridae made a splash with the news that they had acquired Shell\u2019s upstream Alberta assets.<\/p>\n

It\u2019s all part of Pieridae\u2019s plan to secure the natural gas supply to feed their LNG terminal, once built.<\/p>\n

While it may seem audacious that Pieridae would plan to own not only a multi-billion LNG terminal but the upstream natural gas assets as well \u2013 you have to understand this all comes back to cheap German capital.<\/p>\n

Shell\u2019s assets produce about 28,000 boepd.\u00a0 They are primarily older producing wells, many of them 20-30 years old.<\/p>\n

The midstream infrastructure was built for much higher production, which means they can be developed without much additional infrastructure.\u00a0 But most importantly, the assets are conventional reserves and that can be accessed without fracking.<\/p>\n

The one stipulation on the US $1.5 billion upstream German guarantee is that hydraulic fracking is prohibited.\u00a0<\/em><\/p>\n

Both the Shell assets, and those of the previous acquisition of Ikkuma, fit that bill.<\/p>\n

These two acquisitions make Pieridae a sizable, mid-tier (albeit high-cost) natural gas producer in Alberta.\u00a0 Pro-forma production is 40,000-50,000 boe<\/span>\/d, 20% liquids.<\/p>\n

\"2\"<\/a><\/p>\n

Being a natural gas producer in Alberta is less than desirable unless you have a way to get the gas to market.\u00a0 Here is where Pieridae has a unique advantage.<\/p>\n

There aren\u2019t many projects in Canada that can boast accessible pipeline capacity \u2013 but Pieridae can.<\/p>\n

The majority of the trek east will be made on TransCanada\u2019s mainline system.\u00a0 This will be followed by shorter legs on regional TransCanada and Enbridge owned lines.<\/p>\n

\"3\"<\/a><\/p>\n

Capacity on each of these lines can be expanded to accommodate Pieridae\u2019s additional volumes by simply adding compression.\u00a0 Read my lips \u2013 no new pipelines!<\/p>\n

Final Investment Decision<\/strong><\/p>\n

Pieridae has a few options for reaching a final investment decision (FID) on Goldboro.\u00a0 But it seems most likely that they build a single train terminal and defer the second train to a later date.<\/p>\n

The Shell and Ikkuma assets are sufficient for the first train of the LNG terminal.\u00a0 The available pipeline capacity on Mainline and the connector pipelines are enough for the first train.\u00a0 Same goes for the German loan guarantees.<\/p>\n

\"4a\"<\/a><\/p>\n

A single train terminal is expected to cost $6 billion.\u00a0 The combined two train terminal would add up to $10 billion.<\/p>\n

A $6 billion price tag on the first train leaves a funding gap of $1.5 billion.\u00a0 That is still a tidy sum to be found–and means more debt and equity.<\/p>\n

Pieridae expects to issue between $1 billion to $1.3 billion of preferred equity in the project.\u00a0 This will sit below the guaranteed term debt but above the common equity.\u00a0 In an interview, CEO Alfred Sorensen said the company is \u201cwell along\u201d the process of raising this capital.<\/p>\n

The rest of the money \u2013 anywhere between $200 million and $500 million \u2013 will be new equity (dilution).\u00a0 The equity isn\u2019t likely to be issued until next year after the engineering and design study and the FID is made.<\/p>\n

While those are still big numbers, they seem more attainable as Pieridae gets closer to securing the low-cost debt guarantee from the Germans.<\/p>\n

Project Economics<\/strong><\/span><\/p>\n

Here is where the rubber hits the road.\u00a0 Pieridae has forecast cash costs of $4.50 per mmbtu<\/span> once the first train is up and running.<\/p>\n

\"4\"<\/a><\/p>\n

It\u2019s still early in the game but let\u2019s ballpark it to get an idea of the upside.\u00a0 Assume Pieridae can get 5% debt on the German guaranteed $4.5 billion and 9% on the $1.3 billion preferred.\u00a0 That would be annual interest costs of $350 million.<\/p>\n

With LNG prices of $8\/mmbtu<\/span> (keep in mind Goldboro starts up in 2024 where there is expected to be a shortfall in LNG export capacity) and one train delivering 5 mmtpa per year you can pencil in close to $1 billion of cash flow for the equity in the project.<\/p>\n

If we assume that equity is raised at the current share price ($1), there would about 300 million shares outstanding.<\/p>\n

That means over $3 per share in cash flow to the common.<\/p>\n

Its rough and all the numbers need to be validated but you can see how this could work out big.<\/p>\n

All or Nothing<\/strong><\/span><\/p>\n

Consider that\u2026<\/p>\n