15 July 2015

Liquefied Natural Gas Ltd is a research client of Edison Investment Research Limited

ADR research

Liquefied Natural Gas Ltd (LNGL) has two LNG liquefaction projects in development with planned start-ups in 2018/19. The company is using its own patent protected technology (OSMR®), which should lead to lower capex and opex costs. Lump sum turn-key contracts are being finalized, while tolling fees arrangements mean that cash flows from the projects are predictable (and material). Despite the significant share price rise in the last 18 months, our modelling indicates that there is significant value accretion available for investors. Our risked DCF approach implies a value of A$3.7/share (US$10.9/ADR), but a NAV over time reveals that this could increase to over A$9/share (US$27/ADR) in 2019.

Year end Revenue ($m)

PTP* ($m)

Operating cash flow ($m)

Net (debt)/cash ($m)

Capex ($m)

06/13 0.0 (9.9) (5.7) 1.2 (0.0) 06/14 0.0 (18.3) (16.1) 35.0 (0.2) 06/15e 0.0 (30.8) (35.0) 139.7 (15.7) 06/16e 127.9 117.5 122.1 261.8 0.0

Note: *PTP is normalized, excluding intangible amortization, exceptional items and share-based payments. Note: Converted at 0.77/US$1. Dividend yield excludes withholding tax. Investors should consult their tax advisor regarding the application of any domestic and foreign tax laws.

Financial close fort Magnolia in 2016 The company has made good progress. Although the financial close has slipped to 2016 (from mid-2015), the first production is still targeted as late-2018, as LNGL will begin early works on the site after the FID, due in 2015. Binding agreements with the tolling partners and an EPC are still awaited, but the company is confident of finalizing these in the coming months.

Funding: Magnolia and Bear Head The Magnolia (US, 8mtpa) and Bear Head (Canada, 8-12mtpa) projects both have the potential to provide material cash flows for LNGL. Magnolia’s capital costs should be funded by a mixture of equity (from partner Stonepeak Partners) and debt (via BNP Paribas), meaning that LNGL is fully carried. Bear Head is currently 100% owned and requires further funding, although should contribute significant value to the company.

Valuation: Material growth over time With projects more than three years away from start-up, we rely on a mixture of approaches. Our current risked DCF is A$3.7/share (US$10.9/ADR), but we can view DCF-based valuation over time and cross-check with the implied valuation from peer multiples. Both approaches suggest material long-term upside to the current share price – possibly over A$9/share (US$27/ADR) in 2019/20, although investors will apply risk factors to project economics, given the current LNG market and development stage. With the low costs that OSMR® promises, we are optimistic that both projects will succeed, realizing value over time.

Liquefied Natural Gas Ltd Company outlook

Assets and long-term growth

Price US$11.43 Market cap US$1,440m

ADR/Ord conversion ratio 4 Net cash (US$m) (estimated end June 2015)

146

ADRs in issue 126m

ADR Code LNG AU; LNGLY US

ADR exchange OTC

Underlying exchange ASX

Depository Deutsche

ADR share price performance

52-week high/low $16.2 $7.22

Business description

Liquefied Natural Gas Ltd is an ASX-listed company devoted to the development of two LNG export terminals (in US and Canada) with total capacity of 16mtpa, which are planned to reach financial close in 2016 and start production in 2018/19.

Next events

Binding offtake agreement

2015

Binding EPC wrap 2015

Analysts

Will Forbes +44 (0)20 3077 5749

Ian McLelland +44 (0)20 3077 5756

oilandgas@edisongroup.com

Edison profile page

Oil & gas

Liquefied Natural Gas Ltd | 15 July 2015 2

Investment summary

Company description: Global LNG developer Liquefied Natural Gas Ltd (LNGL) (ASX and ADR-listed) is devoted to the development of more efficient natural gas liquefaction plants, which are expected to have significantly lower capital and operating costs than existing technologies. The company is currently developing two LNG liquefaction plants in North America, the 8mtpa capacity Magnolia LNG (MLNG) plant (Louisiana), and the 8-12mtpa Bear Head project (Nova Scotia) based on its Optimised Single Mixed Refrigerant (OSMR®) technology. Its Fisherman’s Landing project is an option, while another development (to be disclosed) in North America is being investigated.

LNGL has made great strides in the last year and is now a much more substantial company. As well as the addition of Bear Head to the existing Magnolia project, LNG has attracted a number of marquee partners and investors. The Magnolia project has seen some delays, but is still planned to see first LNG in late in 2018 (we assume 2019), and the advanced stages of the Bear Head site means that 2019 first gas is also possible.

Valuation: Compelling long-term value The predictable cash flows due to the projects’ tolling fee arrangements mean that they can be highly leveraged – the company anticipates 70% debt funding. This leaves the company with little need to source external capital for Magnolia after the commitment of Stonepeak to contribute the remaining equity capital (around US$660m). Bear Head (100% WI) will require capital, and it is not clear how much interest the company will be able to retain. While cash flows from Magnolia should be material, they will start-up three years after capital is required, and the appetite of banks to fund more than 70% is not known.

The company has hit many milestones, but the majority of de-risking is still required (including negotiation of a turn-key EPC contract, regulatory approvals, execution of binding tolling agreements, raising of debt funding, construction and commissioning). Risking remains highly subjective, but we apply a 60% risk to 8mtpa Phase 1 and 2. This implies a valuation of is A$3.7/share (US$10.9/ADR). However, should the project go ahead and production start as planned, this value will grow very strongly over time.

Financials: Magnolia funded, Bear Head requires capital Financing of the first 8mtpa phase at Magnolia should be completely funded by a combination of equity contributed by Stonepeak (30%) and debt arranged by BNP Paribas (70%). The financing of Bear Head is less certain, with the company currently holding 100% of a development that could require over US$950m of equity capital (even assuming 70% debt and an 8mtpa project). In addition, the company needs to fund the development costs pre-FID. We therefore assume the company brings in equity partners. Once started, the projects will contribute significant free cash flows.

Sensitivities: Predictable cash flow The nature of the tolling fees means that project cash flows should be reliable and hence similar to a utility. The projects will receive fixed tolling fees for a guaranteed level of LNG production capacity (opex covered by the tolling fees). As such, much of the project uncertainty will be resolved when binding contracts are signed. We believe the main risks to the value of the projects are the actual tolling fees agreed, delays and possible tax increases.

Liquefied Natural Gas Ltd | 15 July 2015 3

Company description: US LNG solution

Liquefied Natural Gas Ltd (LNGL) is devoted to the development of more efficient natural gas liquefaction plants, which are expected to have significantly lower capital and operating costs than existing technologies. The company is currently developing two LNG liquefaction plants in North America, the 8mtpa capacity Magnolia LNG plant (Louisiana), and 8-12mtpa Bear Head project (Nova Scotia). A third development (as yet undisclosed) in North America is being investigated.

As a company, LNGL has grown materially in the last 18 months. The Magnolia project has progressed well and financial close is still targeted for H215 (with first gas in 2019). The acquisition of the 100%-owned Bear Head project was announced in 2014, more than doubling the future net production capacity (FID 2016, estimated first LNG in 2020).

These developments have driven a material re-rating of the shares from under A$0.5/share to nearly A$5.0/share over the last 18 months. The company has also taken advantage of more positive sentiment to raise over $A250m in equity, putting it in a strong position to develop both projects. The company has shares listed on the Australian exchange and ADRs in New York.

Technology overview

OSMR® – new technology but has the prospect of lower capex and opex LNGL has patent protection for its OSMR® technology, which management states will require notably lower capital investments, as well as lower operating costs. The OSMR® technology is a new combination of a number of existing technologies. Investors may therefore be concerned that a new, untested, technology is higher risk. There is risk to new technology, but we point to a number of factors that should help frame the uncertainty.

The technology is a new combination of existing proven technologies and as such, each has been shown to work independently. It is the integration of three proven technologies/processes – single mixed refrigerant process (the oldest LNG liquefaction technology), combined heat and power (which is used extensively in the power industry) and ammonia refrigeration (which is one of the most used refrigeration technologies in industrial applications). Furthermore, a number of studies have been executed by third parties, including by CH-IV (2008), Foster Wheeler (developer of multiple LNG systems globally), Arrow-WorleyParsons (2009 and 2010), and HQC and Consultants (2010). A report was also issued by SK E&C in June 2009, and updated in 2013. This concluded that OSMR® should be highly reliable and provide good utilization.

Reports are worth referencing, but when companies are willing to put their own cash at risk via use of the technology, it should be more noteworthy. In this regard, both SK E&C and KBR will be responsible for the execution of the turn-key projects at Magnolia and Bear Head and will be responsible for not just delivery on time/budget (‘delay liquidated damages’), but guaranteeing a minimum production level (‘performance liquidated damages’).

Patent protection Patent protection could lead to valuable future licensing fees for the company. For Magnolia LNG, LNGL will receive a fee of 3% of capex costs (US$66m) at financial close and a technology licence fee of US$25m for each of Phase 1 and 2, giving an NPV contribution to LNGL of around US$70m. This is a material value to LNGL, but modest compared to the value of developing the project as a full equity partner. Patents have now been granted in 16 countries, including US, Canada and Australia.

Liquefied Natural Gas Ltd | 15 July 2015 4

Lower capex and opex Through the OSMR® technology, LNGL plans to reduce capex and opex costs compared to existing options. According to the company, capex costs for conventional technologies (by which we interpret single double and propane mix refrigerant systems) are around US$1,000/tpa, while the OSMR® for trains 1 and 2 are significantly lower (US$500-600/tpa). Plant efficiency should compare well with other technologies, with lower fuel usage, leading to a 25% improvement over a single mix refrigerant process. The smaller train sizes (vs those typically used by Shell and BG for example) also allow a modular development and enable a small company such as LNGL to be a credible developer. More information can be found on the LNGL website.

Abundant sources of gas due to US shale boom

Magnolia and Bear Head are placed to take advantage of the shale gas boom in the US and Canada. Massive existing infrastructure, increasing technological progress and available capital has seen a huge surge of gas production, reducing prices hugely.

Exhibit 1: Henry Hub gas price

Source: Bloomberg

In this environment, the US has the potential to provide gas to LNG export schemes without risking major price increases. We anticipate Magnolia could be fed by the Haynesville and Eagle Ford, with areas further afield also possible. Bear Head will be supplied from the massive Marcellus and Utica shales with exploration offshore Nova Scotia a possible longer-term supplier to fold in if successful.

Exhibit 2: Shale gas plays in Lower 48 states

Source: EIA

0

2

4

6

8

10

12

14

16

Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15

Henr

y hub

, $/m

mbtu

Liquefied Natural Gas Ltd | 15 July 2015 5

LNG demand forecasts and markets

Investors are right to question the ability of all the world LNG projects currently planned to actually be built (LNGL’s projects included). LNG prices suffered from the fall in oil prices in late 2014/early 2015 as many of the LNG prices are based on an oil index mechanism. A slow market evolution towards market liberalization, helped by new supply from Australia, East Africa, US, Canada and the Middle East mean a more efficient supply chain in the long term. A trading hub in Asia is talked of, with a number of locations competing.

We do not currently model global LNG supply/demand in detail. However, referencing the market predictions of Japanese prices as a marker, LNG prices are currently expected to be $10/mmbtu or more for the next six years.

However the market evolves, we are confident that LNG demand will be supported. Russian gas feeding Chinese demand may reduce LNG demand growth, but may mean markets in Europe strengthen. According to Woodmac (Exhibit 3), LNG demand will grow by around 6% per year to 2025, representing required new capacity of 23mtpa every year. Within this framework, the additional capacity potentially added by US projects in 2018/19 will likely surpass the demand growth in those years (especially if we include other global projects). However, the 23mtpa of demand growth each year should absorb this supply over time. Ultimately the lowest cost projects should survive through to sanction, and we believe LNGL’s technology and locations put the projects in the low-cost banding.

Exhibit 3: Global LNG demand by region

Exhibit 4: Global prices declined in 2014, but are expected to recover long term (referencing Japan)

Source: Woodmac, via Cheniere Source: Bloomberg, Edison Investment Research

Distance to markets in South America and Europe are an advantage Given its tolling nature, once up and running, the market for LNG produced by Magnolia and Bear Head is incidental to LNGL. However, it is important to know the relative proximity of the projects to key markets, which we see as South America and Europe to give confidence on the likelihood of the projects reaching sanction and construction. It is clear from the table below that Nova Scotia (Bear Head) offers very substantial advantages in terms of days sailing to Europe than Magnolia (Lake Charles), which in turn is better placed than Qatar. This further reduces the all-in cost to deliver the LNG vs competitors (given expected lower liquefaction costs).

0

5

10

15

20

Aug 1

4Ja

n 15

Jun 1

5 6M 11M

16M

21M

26M

31M 3Y 41M

46M

51M

56M

61M

66M

71M

76M

$US/

mmbtu

LNG-HH differential LNG-HH differential: futureLNG prices to Japan Henry HubLNG prices to Japan: future Henry Hub: future

Liquefied Natural Gas Ltd | 15 July 2015 6

Exhibit 5: Days sailing from projects Lake Charles Nova Scotia Qatar Zeebrugge, Belgium 10.9 6.5 14.5 Isle of Grain, UK 10.8 6.5 14.5 Fos Sur Mer, France 12.0 7.6 10.5 Montoir, France 10.4 6.2 14.1 Bilbao, Spain 10.7 6.0 13.5 Barcelona, Spain 11.6 7.5 10.5 La Spezia, Italy 12.5 8.3 10.2 Mangalore, India 22.0 18.0 4.0 Source: Pieridae Energy

Other LNG projects in the US

Magnolia is by no means the only project in the US seeking to export LNG, with five projects under construction, two with Draft Environmental Impact Statements (DEIS) issued and two (including MLNG) with a Schedule of Environmental Review (SER). In total, there are ten projects with Federal Energy Regulatory Commission (FERC) notice to proceed issued (or due to be issued in 2015). Investors may be concerned that this volume of new LNG on the market may reduce LNGL’s ability to find tolling partners for the offtake.

Notably, despite the fact that Magnolia is not yet under construction, first LNG from MLNG is due around the same time (or earlier) than many of the projects ahead of it. As a result, we would hope that the project has the advantage over its rivals (particularly Jordan Cove, Trunkline LNG and Southern LNG) in its ability to deliver LNG in the shortest timescale.

Exhibit 6: Magnolia Project US state Anticipated FERC

order Anticipated

COD Comments/status

Cheniere Sabine Pass (1-4) LA Apr-12 2016 Order received, under construction Freeport LNG TX Jul-14 2018/19 Order received, under construction Cameron LNG LA Jun-14 2018/19 Order received, under construction Cover Point MA Sep-14 2018 Order received, under construction Cheniere Corpus Christi TX Dec-2014/Jan-15 2019 Order received, under construction Jordan Cove OR 2015 2019/20 DEIS issued Nov 2014 Cheniere Sabine Pass (5-6) LA 2015 2019 DEIS issued Nov 2014 Trunkline LNG LA 2015 2019 SER issued Magnolia LNG LA 2015 2018 SER issued Southern LNG (Elba Island) GA 2015 2019 Awaiting PHMSA approval and SER Source: LNGL. Note: COD is commencement of delivery, PHMSA is Pipeline and Hazardous Materials Safety Administration.

Liquefied Natural Gas Ltd | 15 July 2015 7

Project summaries

LNGL continues to progress its marketing efforts, as can be seen in Exhibit 7.

Exhibit 7: Key information on projects Magnolia Bear Head Fisherman's Landing Current equity interest c 52%, Stonepeak Infrastructure Partners c 48% (dependent on

IRR expected at FID) 100% (we model 80%) 100%

Location Lake Charles, US Nova Scotia East Coast, Australia Size of land 108 acres 255 acres 60 acres, site lease extended

until March 2016 Capacity 8mtpa (two 4mtpa phases planned) 8-12mtpa (two 4mtpa phases

planned, third 4mtpa possible) 1.5mtpa

Capex Company guidance – US$3.5bn gross/Edison US$3.7bn for 8mtpa (includes debt interest repayments at 7.5%)

Edison US$3.5bn

FID Mid-2015 2016 On hold Equity partner (funding provided)

Stonepeak (30% of Magnolia costs, currently expected to be US$660m for Phase 1, Stonepeak will also provide finance for Phase 2)

None as yet None

Capital costs Phase 1 (trains 1 and 2) – company expectation of $1.986bn (Edison $2.2bn for conservatism) Phase 2 (trains 3 and 4) – company expectation of $1.014bn (Edison $1.2bn for conservatism) LNGL also points to $500m company costs for Phases 1 and 2

Edison estimates – same as Magnolia

Edison estimates – same as Magnolia

Financial close Financial close Q116 On hold First gas Late 2018 (we assume early 2019) 2019 (we assume 2020) On hold Gas source US gas network US gas network MOI with Tri-Star Petroleum,

discussions with PetroChina over securing gas supply

EPC partners KBR, SK E&C KBR, SK E&C On hold

Tolling partners

Four non-binding LNG tolling agreements (LTA) term sheets in place for 7mtpa

Two negotiating for sales and purchase agreements (SPAs) for 1.7mtpa

3.7mtpa draft LTAs in mark- up stage 6mtpa of other SPAs or LTA with four other parties in discussion Following the ASX release on 23 April 2015, Magnolia LNG and Meridian LNG are in discussions to complete binding agreements for a total of 2 million tons per annum LTA. The Company will announce the LTA terms upon execution of the binding contract.

Source: LNGL

Magnolia (Lake Charles) 8mtpa start 2019e

The Magnolia project is a four-train (two-phase), 8mtpa LNG plant planned to be built in the Port of Lake Charles, Louisiana. The plant will use LNGL’s proprietary OSMR® liquefaction technology. A pipeline capacity agreement was signed in 2014 with Kinder Morgan Louisiana Pipeline (KMLP).

LNGL is partnering with Stonepeak Infrastructure Partners on Magnolia. Stonepeak will be providing the equity required to develop the first train (4mtpa) of the project, which will be around US$660m, the rest (70%) will be debt financing. The agreement is structured so that Stonepeak will be assigned an equity ownership such that it achieves a specified IRR, with LNGL retaining the rest (we model 52% of the project). A similar deal will be reached for trains 3 and 4 (phase 2), though given the much reduced capex bill for Phase 2 (we model US$1.2bn vs US$2bn), the equity share retained by LNGL should be larger.

The company has an agreement with BNP Paribas over the debt provision.

The project development timing has slipped from our initiation note last year. Financial close, originally mid-2015, has been pushed out to Q116. However, the company plans to start an early work program in H215 and site work in Q116 in order to be able to hit the late 2018 start-up target.

Liquefied Natural Gas Ltd | 15 July 2015 8

There are risks involved, as the company will be spending cash before financial close. While the risk of project cancellation is relatively low, we think the company has seen a previous project cancelled after significant expenditure on early works – thereby incurring expense (the source of the gas of the Fisherman’s Landing project was acquired by Shell in 2010, leading to project cancellation). We therefore imagine that these preliminary works will be relatively small in nature.

The next steps are as follows:

binding offtake agreements – LNGL is looking to close binding agreements for 2mtpa, and is “well advanced for further 2mtpa”. Further 4mtpa LTAs are also being negotiated.

binding EPC wrap – KBR and SKE&C are finalizing the lump-sum turn-key EPC contract.

binding term sheet for debt – BNP advisor is the debt arranger.

We are very encouraged by the deal announced by LNGL in April 2015, regarding the execution of a 20-year gas sales agreement with Meridian, which has a 20 year GSA with an E.On subsidiary.

Bear Head project (Nova Scotia) 8-12mtpa start 2019

In August 2014, LNGL finalized its acquisition (for US$11m) of the Bear Head project in Nova Scotia from Anadarko and consequently owns 100% of the project. The site was formerly planned to be an LNG import terminal which had been mothballed in 2007, due to the shale revolution in the US. The site has the advantage that much of the permitting and approvals have already been granted and civil works had already got to an advanced stage (see below). Roads, utilities and foundations for two 180,000m3 LNG tanks are complete.

The site is large (255 acres vs 108 at Magnolia) and the company has ample space for 8mtpa (two phases). Indeed, it has filed applications with the Canadian authorities for up to 12mtpa of capacity. KBR started FEED in May 2015 and FID is planned in 2016, with first gas in 2019.

Exhibit 8: Bear Head site

Source: LNGL

We assume that first gas for 8mtpa is in January 2020 (vs 2019 as guided by the company), with the final 4mtpa coming online in January 2025 (as hinted at by company filings with regulatory bodies).

LNGL currently owns 100% of the project. We expect the capex requirements to be broadly similar to Magnolia for the first 8mtpa. While much of the civil works are complete, the project may cost more, given the harsher climate in Nova Scotia. This would leave the company needing to source well over US$500m even if it is able to fund 70% with debt. This is a material amount, and while the

Liquefied Natural Gas Ltd | 15 July 2015 9

company has successfully raised over A$200m in the last 12 months, it has diluted its shareholders to do it. We believe the funding will be resolved in the next 12 months, whether the company seeks a similar third-party equity partner as it has in Magnolia, or look to other funding options (including equity raises). Under our assumptions, large capex bills will not be incurred for two to three years, but the constructors of the equipment will need transparency over funding. For the moment, we assume that the company retains 80% of the project and funds the remaining for Phase 1 through equity partners and some internal funding. In our model we have delayed Phase 2 and 3 until 2024, by which time the cash (and leverage possibilities) from Magnolia will fund capex requirements.

Partners and milestones The Bear Head project seems to be progressing well with permits for the site, however it is less clear how the company will fund the development and which companies it will partner with to secure the offtake.

We believe there are three main options open to the company: (i) look to sell down a proportion of the asset for full/partial carries on the necessary upfront investment. Even assuming a 70% debt loading, the construction of 8mtpa at Bear Head would require over US$950m in equity capital (assuming a capex bill of US$2bn for Phase 1 and US$1.2bn for Phase 2); (ii) stagger the construction of the Bear Head facility so that cash flows from Magnolia can be leveraged. With Magnolia cash flows not fully kicking in until 2019, it would mean delays to the currently planned 2019 start-up for Bear Head; or (iii) raise capital through equity markets – despite the ability of LNGL to raise equity so far, US$950m is far above the capital already raised and would dilute shareholders. Though some further fund raising is possible, we do not envisage LNGL retaining 100% of a Bear Head project starting in 2019.

Parties to offtake and tolling are likely to be talking to LNGL about Magnolia and Bear Head. Assuming a full suite of tolling agreements for Magnolia, we would expect LNGL to continue to negotiate with parties on further volumes at Bear Head. We would hope that these agreements come in the near term.

Other projects

Fisherman’s Landing We see Fisherman’s Landing as an option. The company has a site lease until March 2016 and is investigating gas sources with partners (including PetroChina). Until further progress is made, it is not a material part of the LNGL investment case. We believe that the company will not progress with the project until a gas source can be assured. We do not expect the company to buy upstream assets.

Other US project The company has hinted that it is looking at a further North American project. Until we receive further details, we do not assign any value to it, though note that the addition of a further project would mean that LNGL could become a large scale LNG developer, with potential volumes of more than 25mtpa from North America. This will however, bring further project management and financing issues.

Liquefied Natural Gas Ltd | 15 July 2015 10

Sensitivities

LNGL is exposed to a number of risks. However, its exposure to commodity price changes is minimal. The company should have no direct exposure to commodity risk, while operating costs movements should be largely mitigated by tolling fees.

Regulation and market risk: the Gladstone project progressed well until the March 2010 acquisition of Arrow Energy by Shell removed the gas source for the project, despite the project being at a late stage. No such obstacle is anticipated for the current projects, although project postponement/cancellation is possible for any project.

Financing risks: LNGL needs to secure the funding for the development of the projects. For Magnolia Phase 1 this is US$3.5bn (gross). Of this, 30% should be funded by equity (from Stonepeak), with the rest funded through debt. Bear Head will require an estimated US$1,540m (70% of Phase 1 capex). Without this funding, the Magnolia project (and hence LNGL’s) value could be severely compromised. However, the involvement of BNP Paribas encourages us regarding the potential funding at this stage.

Technological risk: the OSMR® process has received the technological approval of SK E&C and has the tacit confidence of a range of companies. The contract with contractors should provide performance liquidated damages for capacity should the technology not deliver the modelled efficiencies. The tolling terms sheets also require that Magnolia provides minimum production – if this is not done, the plant could suffer financial penalties.

Cost escalation risk: cost escalation risk is well mitigated. LNGL is seeking turn-key contracts for the construction of the plants, leading to a fixed cost. Should the final quoted cost (at FID) be higher than our current estimates, the equity committed from Stonepeak could increase (up to a maximum of US$800m), while we expect the debt facility could also expand proportionately. This could lead to LNGL retaining a lower stake, but should not present an existential risk to the project.

Protection risk: LNGL has gained patent protection for its combination of technologies in 16 countries, including US, Canada and Australia (countries where its projects are currently located).

Tax risks: Magnolia is subject to federal and state taxes of 38%, with a 2% land tax (2% of asset value, with a five-year tax break). For Bear Head, we apply the 38% corporate tax rate and a 16% Nova Scotia state tax. We have not modelled any other taxes or tax breaks. See the valuation sensitivities section for the effect of additional taxes, which cannot be ruled out.

LNG pricing risks: our base case assumption is that all LNG is sold to FTA-approved countries. However, Magnolia may get approval to sell to non-FTA countries, in which case it potentially may be entitled to additional tolling fees above and beyond the current arrangements.

Management

Given two projects at LNGL, we believe it is important to consider not just the management of LNGL, but the senior roles within each project. We think that the summary CVs are strong.

LNGL key personnel Chairman – Richard Jonathan Beresford has over 30 years’ experience in the international energy industry. Richard spent 12 years with British Gas. He joined Woodside in 1996 where he became general manager, business development, then managing director of Metasource, Woodside's green energy subsidiary. Richard was head of gas strategy and development of CLP Power Hong Kong from 2005-07. He is currently the executive chairman of ASX-listed Green Rock Energy and has been a non-executive director of ASX-listed Eden Energy since May 2007.

Liquefied Natural Gas Ltd | 15 July 2015 11

LNGL managing director and CEO – Fletcher Maurice Brand is the founder, managing director and CEO of LNGL. Maurice has extensive experience in the global energy industry spanning over 26 years, including responsibility for energy-related projects in Australia, Indonesia and India. He is also CEO of both Magnolia and Bear Head.

LNGL CTO – Paul William Bridgwood is the originator of the OSMR® process. He is a mechanical engineer with 35 years’ experience in the energy and resource industries, including offshore and onshore oil and gas, power generation, LNG and related energy projects.

LNGL CFO – Mike Mott joined the company in September 2014. Prior to joining LNG in September 2014, Mike held a number of senior finance, strategy and operations roles at BG. Mike held progressively senior accounting and risk management roles for Dynegy from 1995. He was previously at PWC.

Management of the Magnolia project Magnolia COO – John Baguley has over 30 years’ experience with the global engineering, company KBR, including the last 13 years as a project director in the delivery of front-end engineering design and EPC services for major LNG plants and projects globally. His earlier career experience with ethylene plant cold box system designs, ammonia plant NH3 refrigeration systems and combined cycle compressor drive facilities aligns with the OSMR® process elements that will be used for the Magnolia LNG Project.

Magnolia CCO – Rick Cape has over 30 years’ of experience in oil and gas, with some 20 years with BP. In 2002, he was elected president and CEO to lead the growth of Atlantic LNG from one LNG train to its current four-train, 15mtpa capacity (where development helped to drive down the installed capital costs per tonne of output). Prior to this appointment Rick held positions at Kwinana Refinery (BP) and was head of R&M performance management (BP) among other roles.

Management of the Bear Head project Bear Head COO and project director – John Godbold has led energy projects for Pangea LNG, Gulf Coast LNG and El Paso Energy, and is a former NASA engineer.

Bear Head CFO and CCO – Ian Salmon will be responsible for integrating financial and commercial matters to ensure financing of Bear Head. He previously worked for Morgan Stanley and El Paso Energy.

Valuation

Our DCF approach is one used across our oils coverage and, given the steady predictable expected EBITDA across the LNG projects, should be applicable for the valuation of LNGL. We then apply a risking to account for various factors before the projects start-up (such as uncertainty over possible delays and uncertainty over reaching FID).

We continue to assume EBITDA of US$380m pa per 2mtpa train at Magnolia. For Bear Head, we assume similar EBITDA earnings to Magnolia per mtpa with a corporate tax rate of 38% and 80% working interest (vs current 100%, which allows for possible equity reduction).

Liquefied Natural Gas Ltd | 15 July 2015 12

Exhibit 9: NAV summary Asset Net risked Value

Country Working Interest CoS value Risked Risked % % US$m A$/share US$/ADR

Net (debt)/cash (June 2015e) 100% 100% 140 0.4 1.1 SG&A 100% 100% (45) (0.1) (0.4) Project development costs Jan-Jun 2015 100% 100% (21) (0.1)

Magnolia trains 1&2 US 53% 60% 533 1.4 4.2 Magnolia trains 3&4 US 65% 60% 547 1.5 4.3 Bear Head trains 1&2 Canada 60% 15% 97 0.3 0.8 Bear Head trains 3&4 Canada 80% 15% 116 0.3 0.9 Bear Head trains 5&6 Canada 100% 0% 0 0.0 0.0 Fisherman's Landing Australia 100% 0% 0 0.0 0.0 NAV 1,367 3.7 10.9 Source: Edison Investment Research

DCF valuation over time While the structure of the operations at Magnolia and Bear Head should assure steady EBITDA (currently estimated at US$380m per phase), the fair risking to assign to the projects at the current stage of development is subjective and arguable. There is a risk given the new combination of technologies, but these are all tried and tested in other applications. The construction should be relatively straightforward, and good progress has been made on the progression towards FID and financial close, albeit with some delays from our initiation last year. It is therefore up to the investor to assign a risking with which they are happy.

However, we can see how the implied value increases given our assumptions. Our current risking implies limited upside and we await FID before de-risking to a greater extent, however investors may choose to assign higher chances of success. The chart below demonstrates how we currently believe that value should increase as first LNG approaches. This suggests that by 2019/20, the company could be worth multiples of the current share price.

Exhibit 10: NAV over time grows materially as projects mature

Source: Edison Investment Research

Valuation multiples DCF valuation is a useful method to estimate potential value. As production nears, we expect the market to switch to more traditional earnings multiples. As we described in February, the utilities sector has seen significant multiple expansion in recent times, as very low interest rates have forced a search for yield. Over the time period for data available, the sector EV/EBITDA has ranged from 6.5-13.1x, the P/E from 11.3-20.8x and the P/CF from 6.1-21.1x. It is clear that long-term investors should factor in the possibility that the current multiples could fall from current levels.

1117

2227

3337

40

0

10

20

30

40

50

2016 2017 2018 2019 2020 2021 2022

Value

per A

DR $

Magnolia Trains 1&2 Magnolia Trains 3&4 Fisherman's LandingBear Head Trains 1&2 Bear Head Trains 3&4 Bear Head Trains 5&6

Liquefied Natural Gas Ltd | 15 July 2015 13

Exhibit 11: Long run multiples for utilities

Source: Bloomberg utilities index

We can break this down by subsector.

Exhibit 12: EV/EBITDA multiples by sector Exhibit 13: P/E multiples by sector

Source: Bloomberg, Edison Investment Research Source: Bloomberg, Edison Investment Research

We can then input these rough ranges into our estimated forecasts after first gas to get implied share prices. The results are shown in the following charts.

Exhibit 14: EV/EBITDA implied share prices (potential) vs DCF basis

Exhibit 15: P/E implied share prices (potential) vs DCF basis

Source: Edison Investment Research. Note: Does not take into account any dividends and assumes cash interest rate of 0.5%

Source: Edison Investment Research. Note: Does not take into account any dividends and assumes cash interest rate of 0.5%

Valuation sensitivities Once running, the projects should provide reliable earnings. They are not without risks, of which tolling, delays, taxes and cost escalations are four we seek to quantify.

0

5

10

15

20

25

30

1993 1996 1999 2002 2005 2008 2011 2014

INDU

Inde

x

EV to EBITDA P/E Price to cashflow

02468

10121416

Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15

EV to

EBI

TDA

Median of: EV to EBITDA Electric-IntegratedGas-Distribution PipelinesElectric-Transmission Utilities Index

0

10

20

30

40

Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15

P/E

Median of: P/E Electric-IntegratedGas-Distribution PipelinesElectric-Transmission Utilities Index

0%

5%

10%

0

20

40

60

80

100

2022 2023 2024 2025 2026 2027 2028 2029 2030

Divid

end y

ield

Price

EV/EBITDA at 11x EV/EBITDA at 4xDvd yd for EV/EBITDA at 11x

0%

5%

10%

15%

20%

0

20

40

60

80

100

120

2022 2023 2024 2025 2026 2027 2028 2029 2030

Divid

end y

ield

Price

P/E at 20x P/E at 10x Dvd yd for P/E at 20x

Liquefied Natural Gas Ltd | 15 July 2015 14

Tolling fees – we model that each 4mtpa phase receives EBITDA of US$380m pa through fixed tolling fees. These fees are not yet set through binding agreements. For every US$25m variation of the actual EBITDA to our assumption, the NPV due to Magnolia Phase 1 would fall by 6%.

Delays – the effect of a year’s delay to the start-up of a project may not just be the immediate NPV impact (which would reduce NPV by c 10%). Under the tolling agreements and supply contracts, LNGL may be liable for financial penalties. These are likely to be mitigated by its own contracts with the construction firms KBR and SKE&C, but we cannot guarantee these will be enough.

Additional taxation – we assume a 38% corporate tax rate for both Magnolia and Bear Head, and a 2% land tax at Magnolia and 16% state tax for Nova Scotia. Every additional 5% tax rate would reduce unrisked NPV2015 by around 4-5%. Additional taxes have been mooted in Nova Scotia and cannot be ruled out, but we do not expect them at this time.

Cost escalation – we generalize the MLNG/Stonepeak contract. Under this agreement, Stonepeak is guaranteed a 14% IRR for its investment of US$660m equity capital, which would entitle it to just below 50% of the project. Should the final capex bill rise, its ownership would increase, reducing LNGL’s stake. Should capex increase by 10%, NPV due to LNGL would decrease by around 5%.

Financials

After the successful equity raise at end May 2015, LNGL is currently well capitalized for Magnolia and significant progression at Bear Head. However, as the company is planning early works at Magnolia (before financial close), it will have to fund these early works before any capital inflow from either Stonepeak or from debt providers. As a result, the cash in hand (we estimate $189m at end June 2015) will now fall. Once financial close is reached, success fees from Stonepeak will help replenish cash levels and the rest of the development should not require any further input.

Bear Head however, will require material capital, as the company currently owns 100% WI in the project. With total capex (our assumption) of $3.2bn, even a 70% debt load will leave c $950m required from other sources, to fund the development. The company has two options, either to find partners (as at Magnolia) or delay the start of the project, so that cash requirements match with the cash flows resulting from Magnolia. We do not expect the company to seek to fully fund the project with equity at this point.

Exhibit 16: Cash flows from projects over time

Source: Edison Investment Research. Note: Assumes equity ownership as stipulated in the valuation table, explicitly assumes that Bear Head will attract partners that will carry much of the upfront capital.

(400)(200)

0200400600800

1,000

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

US$m

Magnolia Trains 1&2 Magnolia Trains 3&4Fishermans_Landing Bear_Head 1&2Bear_Head 3&4 Total cashflows (revenues - capex - taxes)

Liquefied Natural Gas Ltd | 15 July 2015 15

Exhibit 17: Financial summary USD 000s 2011 2012 2013 2014 2015e 2016e 2017e 2018e June IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 0 0 0 0 0 127,900 25,000 0 Cost of Sales 498 616 140 204 393 430 652 580 Gross Profit 498 616 140 204 393 128,330 25,652 580 EBITDA (7,034) (12,912) (10,030) (17,615) (31,172) 117,107 13,525 (11,893) Operating Profit (before amort. and except.) (7,092) (12,961) (10,070) (17,654) (31,211) 117,069 13,486 (11,931) Intangible Amortization 0 0 0 0 0 0 0 0 Exceptionals 0 0 0 0 0 0 0 0 Other 0 0 0 0 0 0 0 0 Operating Profit (7,092) (12,961) (10,070) (17,654) (31,211) 117,069 13,486 (11,931) Net Interest (1,786) 615 140 (617) 392 429 651 579 Pre-tax Profit (norm) (8,878) (12,346) (9,931) (18,271) (30,818) 117,498 14,137 (11,352) Pre-tax Profit (FRS 3) (8,878) (12,346) (9,931) (18,271) (30,818) 117,498 14,137 (11,352) Tax 0 0 0 0 0 0 0 0 Profit After Tax (norm) (8,878) (12,346) (9,931) (18,271) (30,818) 117,498 14,137 (11,352) Profit After Tax (FRS 3) (8,878) (12,346) (9,931) (18,271) (30,818) 117,498 14,137 (11,352) Average Number of ADRs 53.4 66.7 66.9 115.5 125.8 125.8 125.8 125.8 EPS - normalized (0.2) (0.2) (0.1) (0.2) (0.2) 0.9 0.1 (0.1) EPS - normalized and fully diluted (0.2) (0.2) (0.1) (0.2) (0.2) 0.9 0.1 (0.1) EPS - (IFRS) (0.2) (0.2) (0.1) (0.2) (0.2) 0.9 0.1 (0.1) Dividend per share 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Gross Margin (%) N/A N/A N/A N/A N/A N/A N/A N/A EBITDA Margin (%) N/A N/A N/A N/A N/A N/A N/A N/A Operating Margin (before GW and except.) (%) N/A N/A N/A N/A N/A N/A N/A N/A BALANCE SHEET Fixed Assets 3,011 5,564 448 216 15,922 15,884 49,211 113,924 Intangible Assets 0 0 0 0 0 0 0 0 Tangible Assets 274 186 91 216 15,922 15,884 49,210 113,924 Investments 2,737 5,378 357 0 0 0 0 0 Current Assets 6,077 6,798 1,952 38,103 143,870 265,927 251,552 180,301 Stocks 0 0 0 0 0 0 0 0 Debtors 219 131 30 254 459 459 459 459 Cash 4,307 5,105 1,173 35,386 140,229 262,285 247,910 176,660 Other 1,551 1,562 750 2,462 3,182 3,182 3,182 3,182 Current Liabilities (671) (893) (1,017) (2,903) (2,861) (2,861) (2,861) (2,861) Creditors (666) (893) (1,017) (2,527) (2,330) (2,330) (2,330) (2,330) Short term borrowings (6) 0 0 (376) (532) (532) (532) (532) Long Term Liabilities (151) (240) (223) (155) (187) (187) (187) (187) Long term borrowings 0 0 0 (9) 0 0 0 0 Other long term liabilities (151) (240) (223) (146) (187) (187) (187) (187) Net Assets 8,265 11,229 1,160 35,260 156,744 278,762 297,714 291,177 CASH FLOW Operating Cash Flow (7,667) (6,838) (5,729) (16,122) (35,033) 122,058 18,992 (6,498) Net Interest 0 0 0 0 0 0 0 0 Tax 0 0 0 0 0 0 0 0 Capex (16) (24) (7) (183) (15,725) 0 (33,365) (64,752) Acquisitions/disposals 0 0 0 0 0 0 0 0 Financing (4,550) 7,666 1,798 50,717 151,950 0 0 0 Dividends (210) (5) 6 (193) 3,659 0 0 0 Net Cash Flow (12,443) 799 (3,932) 34,218 104,851 122,058 (14,373) (71,249) Opening net debt/(cash) (16,738) (4,301) (5,105) (1,173) (35,002) (139,697) (261,754) (247,379) HP finance leases initiated 0 0 0 0 0 0 0 0 Other 7 5 (1) (389) (156) (1) (1) (1) Closing net debt/(cash) (4,302) (5,105) (1,173) (35,002) (139,697) (261,754) (247,379) (176,128) Source: Edison Investment Research, company accounts

Liquefied Natural Gas Ltd | 15 July 2015 16

Contact details Revenue by geography Ground Floor 5 Ord Street, West Perth Perth WA 6005 PO Box 920 West Perth WA 6872 +61 89366 3700 www.lnglimited.com.au

N/A

Management team Chairman: Richard Beresford CEO: Maurice Brand Richard Beresford has over 29 years’ experience in the international energy industry, spanning research, technology commercialization, strategic planning, operations, consultancy, business development, acquisitions, marketing and general management.

Maurice Brand is the founder, of LNG. Maurice has extensive experience in the global energy industry spanning over 26 years, including responsibility for energy-related projects in Australia, Indonesia and India.

CTO: Paul Bridgwood Mike Mott: CFO Paul Bridgwood is the originator of the OSMR® process. He is a mechanical engineer with 35 years’ experience in the energy and resource industries, including offshore and onshore oil and gas, power generation, LNG and related energy projects.

Mike Mott joined the company in September 2014. Prior to joining LNG in September 2014, he held a number of senior finance, strategy and operations roles at BG. Mike held progressively senior accounting and risk management roles for Dynegy from 1995. He was previously at PWC.

Principal shareholders (%) HSBC (various) 42.7 Of which Baupost 11.4 Valinor 9.4 JP Morgan 9.1 National Nominees 2.4 China Haunqiu contracting 2.0

Companies named in this report KBR, BNP Paribas, Cheniere

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