Cheniere Energy (LNG) has a great head start to become the first natural gas exporter in the United States. The company has everything in place with the majority of the permits and financing, now it has a clear trajectory to completing the building of its export facilities. While Cheniere bears have their valid points, the recent pullback of LNG may have created a buying opportunity.
Several articles have come out recently on the topic of the glut of natural gas in the United States and the growth of use worldwide.
This article discusses Exxon Mobile’s (XOM) desire to export natural gas, but the Department of Energy (DOE) won’t approve any more export applications until a study assessing the impact of LNG exports is completed. This is great for Cheniere Energy since it so far has the only approved natural gas export project in the US. Once Cheniere is ready to ship natural gas by 2015 or 2016, it will temporarily have a monopoly on US natural gas exportation. The first DOE study, released in January, found that significant levels of LNG exports could lead to a spike in US wellhead gas prices. The second study won’t come out until the end of summer. These delays have given Cheniere at least a one year lead over competing projects.
The International Energy Agency (IEA) expects total US gas production to rise from 653 billion cubic meters (BCM) in 2011 to 769 bcm in 2017. This excess supply will keep natural gas prices low in the United States which is necessary to keep exporting profitable.
The IEA predicts that natural gas consumption may rise 17% by 2017 from 2011 as demand surges in Asia and the US. Gas demand is projected to rise in Europe over last year as well.
This article, written a couple weeks ago and doesn’t even mention Cheniere Energy, says: “In this strange tale of two markets for the same commodity, North America’s rising natural gas production and lack of export infrastructure could ensure that its overflowing supply continues to sell for an astonishing discount to Asian prices for a few more years.”
This article comments on May 2012 Asian natural gas prices: “Spot Asian LNG prices have this month hit a four-year high of $18 per million British thermal units, up more than 35 per cent over the past year.” Compare this to US natural gas prices that are only around $2.50 per MMBtu.
In the years ahead, the United States will be dealing with austerity measures in paying off its massive debt. By holding growth back with the austerity, natural gas prices in the United States will be kept in check. The United States fiscal challenges make natural gas exportation all the more important.
Cheniere’s commercial contracts are similar to “take-or-pay”. Cheniere receives a tariff whether or not its customers fully use its liquification or regasification facilities. This is one advantage that comes with being the first mover. Even if competitors arrive afterwards that give customers a better deal, Cheniere will have already locked in its customers for the next 20 years. Cheniere already has such contracts in place in its import terminal with Chevron and Total.
Another question is whether Cheniere energy can charge the same fees to liquify the gas, regardless of whether natural gas rates decrease abroad. Perhaps Cheniere can continue charging its same fees despite the changes in natural gas prices worldwide. On the other hand, perhaps natural gas exporters will demand Cheniere reduce its rates if they are taking a hit in profits.
Sabine Pass LNG Terminal
Sabine Pass is located in Cameron Pass, Louisiana. It’s Cheniere Energy Partners (CQP) major project that has LNG storage capacity of approximately 16.9 Bcf (billions of cubic feet) of gas. It has an import terminal for regasification, and is now building an export terminal, Sabine Pass Liquefaction.
Sabine Pass LNG
Sabine Pass LNG is a regasification terminal that takes in approximately $250 million in revenue per year from importing natural gas from Chevron and Total. Total is obligated to make payments of approximately $125 million per year for 20 years starting in 2009. Chevron has a similar deal of approximately $125 per year in obligatory payments.
Sabine Pass LNG is operating at half its capacity. However, due to the oversupply of natural gas in the United States, it’s unlikely the Company will receive any more import revenue. For the same reason, these contracts with Chevron and Total expire in 2029 and most likely won’t get renewed.
Sabine Pass Liquefication
Sabine Pass Liquefication is designed for up to four LNG trains, each with a capacity of approximately 4.5 mtpa (million tons per annum). These trains liquefy the natural gas that comes to the Sabine Pass LNG receiving terminal which is located in Louisiana. The trains then transfer the gas to the receiving export ships. Trains 1&2 will be ready for operation in 2015 or 2016, and trains 3&4 will be ready by 2017 or 2018.
Louisiana is a good location for this terminal. It’s close to five natural gas fields, including Barnett and Haynesville shales – the two largest gas fields in the US which combined produce ~11 Bcf per day. It’s a good location to deliver natural gas to Europe. The only issue I see with the location is it’s quite a bit farther distance from Asia than Australia. Australia is the world’s largest LNG supermarket, and is expected to triple natural gas production over the next decade, as it says in this article. Asia can ship gas from Australia for lower shipping costs. However, the demand still seems to be big enough in Asia that Sabine Pass will export at its full capacity.
Cash Flow Analysis
While Cheniere Energy will have billions in revenues once it’s online, the question is whether it will be able to overcome its massive debt that it will have after its four modular LNG trains are built. A discounted cash flow analysis is needed to determine an appropriate value.
Everything has gone smoothly and it’s all turn key now, so it’s fairly straightforward to apply a discounted cash flow analysis to figure out roughly what the company is worth, although still complicated. Using the Company’s Corporate Presentation released on 5/29/12 is a useful initial guide. On page 3, it estimates EBITDA for Sabine Pass to be $2.8 billion for 2017. While that might be an overly optimistic forecast, if it’s accurate, it will be well more than enough to cover the debt and the stock is undervalued.
Disclosure: I am long LNG.