Shares of NextDecade (NEXT 2.10%) soared by double digits today. Igniting the rally was news that the liquified natural gas (LNG) project developer signed an agreement with a Chinese company to buy LNG from its proposed Rio Grande LNG project. It's an important step for the company.
China's Guangdong Energy Group agreed to buy 1.5 million metric tons of LNG per year from NextDecade. The 20-year contract would see it purchase LNG from train one of the terminal, which could start operations by 2026. It will become NextDecade's second foundational customer, joining Royal Dutch Shell.
Those customers have agreed to purchase a combined 3.5 million metric tons of LNG each year. That puts NextDecade one step closer to sanctioning at least two LNG trains at Rio Grande LNG. The company hopes to make a positive final investment decision on that project in the second half of this year.
However, NextDecade still has a way to go before making that decision. The first two trains would have 11 million metric tons of LNG capacity per year. It needs to contract the bulk of that capacity to justify the investment. It hopes to eventually build 27 million metric tons of annual capacity at Rio Grande LNG.
Securing contracts is only one hurdle. The company will also need to raise billions of dollars in capital to finance the project and the associated carbon capture and storage solution it also aims to develop. That would enable the company to provide customers with low-carbon LNG to help meet their climate goals.
Image source: Getty Images.
While the company has a lot of work ahead of it, there's reason to be optimistic it can succeed. According to Shell's 2022 LNG outlook, a large gap between supply and demand will emerge by the middle of this decade. That's precisely when Rio Grande LNG would come online, making it a potential solution to fill that gap. So NextDecade's stock could have significant upside potential if it can secure enough contracts and financing to move forward with Rio Grande LNG.
There's substantial risk as well. Because of that, investors might want to wait for more clarity on the future of Rio Grande LNG before buying shares.
