NEXT - NextDecade: Don't Get Too Excited On The TotalEnergies News

2023-06-15 08:00:53 ET

Summary

• NextDecade entered into an agreement with TotalEnergies and Global Infrastructure Partners for the development of the Rio Grande LNG project.
• The partnership de-risks the project and is a major step towards funding the project.
• However, it’s unclear what stake NEXT will retain in the Rio Grande LNG facility, while Total is buying into NEXT at much lower than current market prices.

NextDecade Corporation ( NEXT ) took an important step towards taking a final investment decision on its long-awaited Rio Grande LNG project by entering into framework agreements with TotalEnergies ( TTE ) and Global Infrastructure Partners for the development of the LNG facility. The news sent NEXT stock soaring as it gained almost 50% since the announcement.

At first glance, the involvement of such serious players like the French oil and gas major and Global Infrastructure Partners should solve the issue of financing the first phase of the development, estimated at US$11.4B and substantially de-risks the project. However, some unclarities such as NEXT's remaining interest in Rio Grande LNG and the extent of further dilution remain. Issues with the local population seems to not be solved as well. For that reason, I believe that the market may have overreacted and prefer to stay on the sidelines in this one.

Rio Grande LNG overview

The flagship project of NEXT - Rio Grande LNG is an ambitious project with a planned capacity of 27Mtpa and very low carbon footprint. Unlike other LNG facilities, NEXT intends to implement sophisticated carbon-capturing technologies and use net-zero electricity to make the project as environmentally-friendly as possible.

NEXT plans for a two-staged development, whereas the first stage will include 3 trains and has a capacity of 17.6Mtpa and is expected to begin operations in 2027, while the second phase with the remaining 2 trains will be completed afterwards.

Despite the claims of NEXT that its project is environmentally-friendly, the local population is not of the same opinion. The Carrizo Comecrudo tribe has been a vocal opposition of the project and has pressured financial institutions not to participate in the funding of the facility. These efforts seem to have yielded fruit as Societe Generale ( OTCPK:SCGLY ) has pulled out from the project. Needless to say, with NEXT's tiny balance sheet with only US$51.1M of cash and equivalents, constructing the US$11.4B first phase of the project looks impossible without outside support.

TTE and GIP enter the game

Given the need for substantial financing, the framework agreement with TTE and GIP is a major step towards taking a final investment decision and beginning construction. However, the information that has been released about the agreement seems to be incomplete in some regards. While TTE as a public company had to disclose details of its involvement, the same could not be said for GIP. According to the deal, TTE should acquire 17.5% ownership in NEXT in three tranches for a total of US$219.4M with the first tranche already acquired, resulting in 5.06% ownership. The French oil and gas major will also hold 16.7% interest in the first phase of the Rio Grande LNG facility itself, while GIP will be a majority shareholder in the facility. Here things get tricky. I wasn't able to find the exact amount of the GIP's stake in the project. Other news sources corroborate my conclusion that the size of the stake is undisclosed. In light of this, any speculations about the size of NEXT's remaining interest in the Rio Grande LNG project are pure guesswork.

It has to be noted, that under the agreement, TTE shall offtake 5.4Mtpa of LNG from the first phase of the project, which brings the total contracted capacity to 14.4Mtpa or more than 80% of the total.

Implications of the deal

The appearance of TTE and GIP indeed substantially de-risks the project, especially when it comes to financing. With the support of two multi-billion companies, NEXT could be able to obtain the much needed loan financing, while TTE and GIP contribute the equity part.

But from TTE's standpoint, the financial commitment when it comes to the equity investment in NEXT itself is pretty much drop in the ocean. The 17.5% stake is indicated to cost around US$219.4M, which is pennies for the French oil and gas major, which netted US$5.6B for Q1'23 alone. I regard the deal from TTE's standpoint more as an option, which will give the French company a strong say in the governance of NEXT, which is to be the LNG facility operator.

Dilution risk remains

While the involvement of TTE and GIP should answer the Rio Grande LNG funding question to a large extent, dilution risk at NEXT's level is not entirely eliminated. The involvement of TTE itself as a shareholder in NEXT is dilutive as the 17.5% stake is to be reached by issuing new shares at an estimated average price of US$4.86/share, presenting a nearly 40% discount to the last closing price of US$7.75/share. In addition, depending on the NEXT's share in the Rio Grande LNG and the financing structure of the project, the company may have to issue additional shares.

Conclusion

Despite the de-risking of the Rio Grande LNG project with the involvement of TTE and GIP, valuing NEXT remains pure guesswork. The publically released information didn't specify what stake in the facility itself will NEXT retain, which should be a starting point of any valuation attempt. On the other hand, the price at which TTE is acquiring equity in NEXT is substantially below the current market price. While an argument could be made that the French oil major brings value to the project, uncertainty remains high. For these reasons, I'm more inclined to think that the market has overreacted and prefer to watch on the sidelines before additional information about the framework is released.

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