After a 12 year ban on new projects, Qatar Petroleum is to start a new natural gas project in the so-called North Field, Southern section, which they expect to have capacity of 2 billion cubic feet per day, which is the equivalence of 400,000 barrels of oil a day; this should come on-stream in around five years’ time.
The North Field and connected South Pars, which is shared with Iran, is the world’s largest reservoir of non-associated gas and Qatar Petroleum is the world’s top exporter of Liquefied Natural Gas (LNG). Qatar currently produces around 77 million tons of LNG a year and this new production, when on-line, would equate to about an additional 15 million tons a year if they decided to go for the super chilled fuel.
Unlike crude oil which analysts believe will suffer a fall in demand during the next twenty years or so, gas demand is growing and Qatar appears to be positioning itself to be the dominant exporter in future years as in 2019 Australia is expected to take the title due to their continued investment in projects while Qatar has fallen behind due to their previous 12-year ban on new projects.
One of the companies that should benefit from this new production is Nakilat (Qatar Gas Transportation Company) which has the largest LNG fleet in the world mostly owned outright, but sometimes in joint ventures with 67 LNG tankers and 4 LPG vessels.
A LNG tanker costs about $200 million versus a crude oil tanker of around $120 million due to the refrigeration systems and of course the extra monitoring that’s required. Nakilat was formed in 2004 and took delivery of its first two LNG tankers in 2005 and so the company’s growth has been astounding.
We have positions in two bonds issued by Nakilat both maturing in 2033 and both have a scheduled sinking structure, that is they gradually get redeemed by a scheduled amount each coupon payment date up to maturity. One of the bonds has already been sinking, since 2010, while the other is due to start in 2021. As these are both scheduled amortisations we need to look at the average life to assess value so slightly more involved, as the calculation to determine ‘fair value’ needs to build in the extra cash you receive in addition to the coupon flow prior to the maturity date. Broadly, you have an extra payment, from principal, to reinvest as well as your regular coupon and so more compounding to take into hand.
Basically, these two bonds are cheap as a number of investors and their systems do not cope very well with this structure. Both bonds are rated but one is 1st Lien and the other 2nd Lien, a difference in the rating of one credit notch Aa3 verses A1. But both according to our Relative Value Model (RVM) are around 5 credit notches cheap and offer a return and yield of close to 12.5%.
In times of volatility hold your ‘Nakilats tight’ that extra reward due to a little extra complexity is a great cushion for the portfolio.