lng as fuel business case stress test- robust or fragile ha… · the future decade for gas 3...

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Marine Money Offshore Houston Offshore Finance Forum St. Regis Hotel Houston, TX 31 March 2015

John Hatley PE

LNG Initiatives ( MBA, MSE) Americas VP Ship Power

Wartsila North America Cell 281 221 4209

[email protected]

LNG as Fuel Business Case Stress Test- Robust or Fragile

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

Keys

Americas Shale Gale in Gas & Oil, robust / fragile ?

Global Energy Policies, market gamesmanship ?

Feast & Famine preservation ?

Future Ahead, structural shifts?

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Agenda

What ?

Why ? 5 Drivers Set Investment Clock

Conclusions

Recent Market Signals The Future Decade for Gas

3 Pillars LNG Fuel Shale Gas Paradigm Shift ECA Expansion & Vessel Choices

Oil Price Shock ! Business Case: Robust or Fragile?

Sustainability

Feast & Famine Cash Preservation

3 Pillars LNG Fuel Vessels

09 April 2015 5

ECONOMICS

SAFE & RELIABLE

ENVIRONMENT SUSTAINABILITY

Proven LNG systems... reduce risk for yard, owner, & banker... extends LNG value proposition to end customer

Pillar... Environmental Sustainability

Methane has the highest hydrogen to carbon ratio = lowest CO2.

Butane [C4H10]

10:4 (250%)

Propane [C3H8]

8:3 (267%)

Ethane [C2H6]

6:2 (300%)

Methane [CH4]

4:1 (400%)

Natural gas a mixture of hydrocarbon gases associated with petroleum deposits, principally methane.

MGO 1.86:1 (186%) Natural gas… lowest carbon = cleanest burning fuel

How clean ?

CO2

NOx

SOx

Particulates DF Natural Gas

Engine

Diesel Engine

0

20

40

60

80

100

Emission values [%]

-25%

-85%

-99%

-99%

LNG provides significant emission reductions compared to traditional diesel engines

Logic… Economics !

09/04/2015

Pillar… Economics... it saves money!

LNG provides compelling savings… Business Cases demonstrate Payback screen short term … <4 years... Strong cash flows… Higher ROIC & EBITDA Competitive Advantage

How much does LNG cost ?

The Math LNG x 1.7 = Diesel Gallon Equivalent = $1.05 x 1.7 = $ 1.78 gallon diesel equivalent = savings ( $3.37 - $1.78 ) = $ 1.58 per gallon

Source: Zeus LNG Fuel Seminar, August 31, 2011 Houston; Fleet Operators Perspective: Issues the LNG Industry Must Address, David Moseley, Assist Secretary Washington State DOT

August 2011 …LNG captures compelling fuel savings …. nearly half cost of diesel

How much does LNG cost ?

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June 2014… LNG captures compelling fuel savings …. nearly half cost of diesel

Pillar… Safe & Reliable

Viking Energy 2003 Stril Pioner 2004

Europe’s decade LNG experience began offshore North Sea vessels… proven path for technology transfer to Americas

Global Gas Production

09 April 2015

USA is world’s #1 gas producer… US Shale gas production, by itself, exceeds all nations except Russia

Source: LNG for Marine Transportation USA, Houston TX, June 12, 2013; David Sweet President Natural Gas Roundtable http://lngmarineevent.com/presentations/2013/David-Sweet.pdf

Emission Control Areas

13

More Emission Control Areas “ECA” likely soon

ECA Vessel Owner Choices

1. Consume compliant Ultra Low Sulfur Distillate… expensive champagne fuel

2. Switch to alternative fuel: safe, clean, abundant, affordable, & available natural gas as LNG

3. Alternative Compliance… install new technology scrubber … CAPEX, OPEX, space, weight, complexity, & operational tradeoffs

4. Abort the Port

09 April 2015

ECA and SECA mandates force timely choices…

Agenda

What ?


Conclusions




Sustainability


Shale Gas Plays

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Shale …. huge reserves natural gas; nearly century supply

Abundant Gas Supply

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Paradigm shift to shale gas; now 42% of supply... future @ half

SHALE GAS

TIGHT GAS LOWER 48 ONSHORE CONVENTIONAL

LOWER 48 OFFSHORE COALBED METHANE ALASKA

Source: http://www.eia.gov/forecasts/aeo/mt_naturalgas.cfm

40 30 20 10 0

1990 2000 2010 2020 2030 2040

US Shale Gas Production

17% CAGR

41% CAGR

Shale production surge… 2006 frantic… 2010 strong

24% CAGR

Other US

Bakken ND

Eagle Ford TX

Marcellus PA

Haynesville LA

Woodford OK

Fayetteville AR

Barnett TX

Antrim MI, IN

Emission Control Area “ECA” US & Canada

09 April 2015

ECA bubble encapsulates… any flag ships.. 200 nautical miles… low sulfur fuel (equivalence)… August 2012

Source: US EPA, Designation of North American Emission Control Area to Reduce Emissions from Ships

Puerto Rico US Virgin Islands 2014

No. Am. ECA Fuel Sulfur Limit

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Source:http://www.dnvusa.com/industry/maritime/publicationsanddownloads/publications/newsletters/technical_regulatory/2012/north_american_emission_control_area.asp

Fuel Sulfur 0.10 % limit commences 1 January 2015

5 US Game Changers

Source:http://www.google.com/imgres?imgurl=http://www.canadiansailings.ca/canadiansailings/portals/0/April_13/emissions_area_map.jpg&imgrefurl=http:// EIA March 2010 Shale Gas Plays Lower 48 States

US centuries shale gas supply

Natural Gas bargain

Emissions Control Area 2012

EPA Engine Emissions

EPA Fuel Standards

5 gas drivers …shale supply + bargain prices + 3 EPA mandates = set Investment Clock

http://www.lngoneworld.com/

http://www.bunkerworld.com/

Agenda

What ?


Conclusions




Sustainability


Recall Shale Gas

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Shale Oil Plays

09 April 2015 Source: http://www.ogj.com/articles/print/vol-110/issue-12/processing/us-refining-outlook-rosier-than.html

US shale crude revolution; reserves exceed 120 billion BBL

US Shale Crude Production

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Source: http://www.usfunds.com/investor-library/frank-talk/one-of-the-most-notable-stories-of-the-year-energy-renaissance-in-the-usa/

5% CAGR

14% CAGR

58% CAGR

Shale crude surging… 2006 growth strong; 2010 frantic

5 January 2015

26 © Wärtsilä Source: http://www.forbes.com/sites/nathanvardi/2015/01/05/saudi-arabias-750-billion-bet-drives-brent-oil-below-54/

Exert Discipline in the Marketplace amongst OPEC and Non OPEC countries... Key market share focus

Brent Crude Oil Prices

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Source: http://www.nasdaq.com/markets/crude-oil-brent.aspx?timeframe=6m

THEN

NOW Crude severe price drop since June as abundant supplies face weak demand

Oil Prices Dropping

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Source: http://www.bloomberg.com/news/2015-01-26/oil-slides-to-near-6-year-low-as-u-s-supply-seen-worsening-glut.html

26 January 2015

Oil down 60% since June… US WTI crude closes at multi - year low… caused by oil glut from… Strong Supply : US shale boom + Libya restarts large oilfield…& Saudi Arabia not reducing supply Soft Demand: China strong but tapering & EU slight recession…

Discipline Target …US or Russia or ?

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Russia suffering double whammy: Oil rich Ukraine and Black Sea burdened by politics under imposed sanctions as oil takes severe price slide…

Ruble plunges down 50% against USD

Source: http://online.wsj.com/articles/ruble-hits-new-low-as-oil-prices-drop-1417441184

Source: http://www.usnews.com/news/articles/2014/11/10/an-oil-price-cold-war-with-saudi-arabia-not-so-fast-experts-say

Source: http://www.businessinsider.com/ruble-plunging-again-2014-12p://online.wsj.com/articles/ruble-hits-new-low-as-oil-prices-drop-1417441184

1 December 2014

Now 26 January 2015

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Source: http://www.cnbc.com/id/102366561#.

Source: http://www.businessinsider.com/citi-saudi-arabia-wont-win-this-oil-standoff-2014-11 31 © Wärtsilä

Profits negative… Severe Pain

Profits squeezed… Manageable Pain

45 $/BBL

Key Oil Production Cost

45 $/BBL

Total Liquids Production

Brent Breakeven Price

2014 Oil Production

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Source; http://en.wikipedia.org/wiki/List_of_countries_by_oil_production

US vaults to 3rd in world crude production end 2013

Government Breakeven Budgets

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Severe shortfalls @ prices under 100$/BBL, present oil glut & soft prices challenge sustainability beyond short run

45$/BBL Source: https://alfinnextlevel.files.wordpress.com/2014/04/oil_breakeven_deutsche_bank_oct_14.png

Agenda

What ?


Conclusions




Sustainability


Traditional View Sustainable Growth

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% Sales Growth

% Return on Assets ROA

Balanced Growth g* = R T ROA

CASH DEFICITS: Consuming CASH

CASH SURPLUS: Generating CASH

Sustainable Growth Curve g* Insights

New sales require new assets g* = Change in Equity

Equity begin of period

g* = R x Earnings Equity bop

Balanced Growth g* = R x ROE bop

g* = P x R X A X T

Balanced Growth g* = R T x ROA

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g* = Sustainable Growth ROE = return on equity R = retained earnings = 1 – dividend ratio T = Leverage

P = Profitability A = Asset Turnover

Operating Performance

Financial Policy

Offshore Cyclical Turns

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Source:http://mox.ingenierotraductor.com/2012/11/feast-or-famine.html

Feast or Famine…

Famine Market: Poor Sales & Utilization, Profits Challenged

Actions… Sell new equity… dilutes existing shareholders… lowers stock price Increase financial leverage… if banks allow at reasonable terms which

increases costs of borrowing and raises risk, expand credit revolvers. Ease financial covenants… if banks allow… to allow challenging time to

pass and resume more normal market operations. Reduce CAPEX commitments; either delay or outright suspend Reduce , suspend dividend payout… defers shareholders returns of today

until tomorrow Prune marginal activities… focus on core competencies Outsource some or all production… mfg control passed onto others Reduce operational costs and SG&A where feasible Improve efficiencies of inventory utilization to lower support costs. Merge with a cash cow

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Consuming cash… firm must over time restore cash

Sell New Equity

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Source: http://www.thestreet.com/story/13094163/1/whiting-petroleum-corporation-announces-completion-of-offering-of-common-stock.html

27 March … $1.0 billion equity proceeds

Proactive Action

Flexible Liquidity

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2015 March Scotia Howard Weil Energy Conference… cash and revolver… dividend reduction

Proactive Action

Ease Financial Covenants

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2015 March Scotia Howard Weil Energy Conference… amended interest coverage ratio relief going forward

Proactive Action

Reduce CAPEX Commitments: Delay, Suspend

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2015 March Scotia Howard Weil Energy Conference… global new build delivery delays

Proactive Action Views

Reduce Dividend Payout

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2015 March Scotia Howard Weil Energy Conference… quarterly dividend reduced to $0.15 from $0.75

Proactive Action

Prune Marginal Activities

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2015 March Scotia Howard Weil Energy Conference… four vessels to be sold to US Navy

Proactive Action

Reduce OPEX Costs

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2015 March Scotia Howard Weil Energy Conference… 15% OPEX reduction, 15% G&A reduction

Proactive Action

Improve Efficiencies

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Proactive Action

2015 March Scotia Howard Weil Energy Conference… drive supporting efficiencies

Merge with Cash Cow

? ? ?

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Stay tuned………………………………………….

Feast Market: High Sales & Utilization, Profits Strong

Sell new equity… dilutes existing shareholders Buyback shares… returns capital to stockholders… raises stock price

Increase financial leverage… if banks allow at reasonable terms which increases borrowing costs & raises risk Pay-down loans… which reduces borrowing costs & reduces risk

Reduce dividend payout… defers shareholders returns of today until tomorrow Increase dividend payout or have special one time cash dividend

Prune marginal activities… focus on core competencies Buy complimentary activities… leverage core competencies

Outsource some or all production… mfg control passed onto others Bring in more production… retain greater mfg control in-house

Increase prices… tempers demand & reduces market share growth Reduce prices… increase demand and gain market share growth

Merge with a cash cow Buy a cash strapped high growth company than compliments or fills a strategic portfolio need.

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Producing too much cash… firm must over time better utilize cash

Agenda

What ?


Conclusions




Sustainability


7 January 2014

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Source: http://www.worldlngfuels.com/news/more-than-40-lngfueled-ships-planned-in-north-america-world-lng-fuels-conference-to-examine/

LNG Fuel SCORECARD

17 Ferries

12 Tankers & Bulkers

6 Offshore Vessels

6 Container Ships

1 Articulated Tug Barge

North America’s marine LNG fuel launch… eclipses Europe !

14 February 2014

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Source: http://www.bizjournals.com/jacksonville/print-edition/2014/02/14/why-is-jacksonville-suddenly-lng.html?s=image_gallery

3 LNG players pursue Jacksonville: Pivotal LNG + WesPac Midstream, Clean Energy, and SEMPRA US Power & Gas

14 February 2014

52 © Wärtsilä Source: http://www.marinelog.com/index.php?option=com_k2&view=item&id=6264:harvey-gulf-breaks-ground-for-lng-fueling-facillity&Itemid=227 .

Harvey Gulf Port Fourchon LNG fueling facility operational 2015

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18 February 2014

2 Vessels… total 94mW = North America’s largest LNG conversion undertaken !

Source: http://www.motorship.com/news101/lng/tote-goes-with-wartsila-four-strokes-for-lng-conversions

24 February 2014

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MARAD Title 11 program expands economic criteria to include environmental technology… LNG fuel !

Title 11: US Government Loan Guarantee… term 25 years, 12.5% equity… provides Ship Owners US Treasury Borrowing Rates + premium

25 February 2014

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Source: http://www.marinelog.com/index.php?option=com_k2&view=item&id=6310:tote-cuts-steel-for-lng-fueled-containership&Itemid=227 .

1st LNG fuel containerships commence construction @ NASSCO

11 March 2014

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Source: http://www.marinelog.com/index.php?option=com_k2&view=item&id=6373:elliott-bay-design-group-gets-aip-for-lng-bunker-barge&Itemid=225 .

LNG bunker barge designs moving industry forward

16 April 2014

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Source: http://www.marinelog.com/index.php?option=com_k2&view=item&id=6580:lockheed-martin-delivers-lng-tank-for-harvey-gulf-newbuild&Itemid=231

Americas industrial base expanding supply of key LNG enablers

http://www.marinelog.com/index.php?option=com_k2&view=item&id=6580:lockheed-martin-delivers-lng-tank-for-harvey-gulf-newbuild&Itemid=231

















17 April 2014

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Source: http://www.caribbeanbusinesspr.com/prnt_ed/crowley-extremely-positive-about-lng-units-growth-prospects-9768.html

Safe, clean, low cost LNG fuel from US shipments may lower power costs…

16 June 2014

59 © Wärtsilä Source: http://www.marinelog.com/index.php?option=com_k2&view=item&id=6853:nassco-books-another-jones-act-tanker-order&Itemid=223 .

American Petroleum Tankers “APT” orders another LNG ready tanker from NASSCO

25 June 2014

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Source: http://www.marinelog.com/index.php?option=com_k2&view=item&id=6905:crowley-seeks-title-xi-guarantees-for-lng-fueled-conro-pair&Itemid=223 .

Crowley and TOTE filing for MARAD Title 11 Loan Finance Guarantees

3 July 2014

61 © Wärtsilä Source: https://www.bcferries.com/bcferries/faces/attachments?id=856428

Now 6 LNG fuel ferries for Canada as BC Ferries (3) follows STQ

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15 July 2014

Source: http://maritimeintel.com/maersk-warns-sulphur-regulation-will-cost-us250-million-annually/

Prohibitively expensive compliant diesel inside ECA in 2015 !

More Traditional Pain = More LNG Gain

19 November 2014

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Source: http://www.marinelog.com/index.php?option=com_k2&view=item&id=8277:seaspan-orders-two-lng-fueled-ferries&Itemid=230

Now 8 LNG fuel ferries for Canada

1 December 2014

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Source: http://www.marinelog.com/index.php?option=com_k2&view=item&id=8341:fortisbc-provides-c$5-million-incentives-for-lng-fueled-ferries&Itemid=231

2 December 2014

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Source: http://www.marinelog.com/index.php?option=com_k2&view=item&id=8352:abs-approves-lng-fueled-z-drive-towboat-design&Itemid=231

River towboats 100% ECA bound consider LNG fuel.

6 February 2015

66 © Wärtsilä Historic 1st LNG fuel bunkering North America

Source: http://www.marinelog.com/index.php?option=com_k2&view=item&id=8703:harvey-gulf-makes-lng-fueling-history&Itemid=231

6 February 2015

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Martin Midstream Partners cryogenic truck loading LNG fuel to Harvey Energy at Pascagoula Mississippi

Source: Courtesy Harvey Gulf International Inc. and Gulf Coast Shipyard Group.

9 February 2015

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Source: http://www.marinelog.com/index.php?option=com_k2&view=item&id=8703:harvey-gulf-makes-lng-fueling-history&Itemid=231

6,500 m3 Bunker Vessel for Rotterdam

5 March 2015

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Maritime History: 1st Offshore LNG fuel Vessel for North America enters service

Source: http://www.marinelog.com/index.php?option=com_k2&view=item&id=8822:harvey-energy-starts-working-for-shell&Itemid=231

20 March 2015

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STQ Ferry F. A. Gauthier on sea Trials, 1st LNG Fuel Ferry North America soon to enter service

Source: http://www.marinelog.com/index.php?option=com_k2&view=item&id=8896:lng-fueled-ferry-wont-reach-quebec-until-april&Itemid=231

Drivers = Decade Shift to Gas

09 April 2015

Mid decade market tipping point

Source: US EPA web sites, Hatley capture various sources

Geographic emissions bubble encapsulates US/Canada Tight sulfur limits stress supply After treatment burdens diesels

Paradigm shift to gas 1st on economics 2nd on emissions

Early adopters moving ahead… soon early followers !

Mandated Emissions & Fuel Restrictions

2015 Fuel Sulfur 1/10% = Stress

Agenda

What ?


Conclusions




Sustainability


lng as fuel business case stress test- robust or fragile ha… · the future decade for gas 3...

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