Relative valuations of merchant and tolling LNG models considering alternate capital structures
As recently as 2008 liquefied natural gas (LNG) import facilities were being constructed in the United States in order to help meet domestic demand. Within the past five years, the development of hydraulic fracturing has created a seismic shift in the energy landscape as companies are turning their focus to exporting LNG instead of importing it. Today, there are currently more than twenty liquefaction facilities awaiting regulatory approval to export domestic product to non-Free Trade Agreement nations. As of November 2013, regulators have approved export capacity of approximately 2,300 billion cubic feet per year, a figure which could rise dramatically over the next decade. Clearly the shale revolution, which has suppressed domestic natural gas prices relative to European and Asian markets, has created an intriguing arbitrage opportunity. The risks to LNG asset owners, however, are high. Long-term domestic and regional prices are uncertain, and capital expenditure costs require a heavy debt burden.
We will examine two primary LNG contract structures with altering project financing considerations. The first is the merchant model, in which the LNG asset owner takes title to the supply. The second is the tolling model, in which the LNG asset owner does not take title to the supply. Each of these scenarios will be valued using a high debt, low equity capital structure and a medium debt, medium equity capital structure. Once we have determined the relative valuations of each scenario, sensitivity analysis and Monte Carlo methods will be applied to the outcomes in order to determine the optimal combination of contract structure and capital structure for both debt and equity holders.