_

Despite worldwide moratoriums on fracking of new wells, natural gas prices continue to hover around $3 per MMBtu, up from a frighteningly low $2 per MMBtu. The natural gas industry it seems has outsmarted itself and overproduced while at the same time a global economic slowdown is reducing demand. This chart from the US Energy Information Administration shows a clear inverse relationship between domestic production and price.

Earlier this year Chesapeake Energy (CHK) announced that it might reduce production by cutting its natural gas rig count, and they’re not the only ones to do so. Overall natural gas rig counts began dropping slightly in the first half of 2012. Notice however, that the percentage of new rigs being deployed to extract natural gas has been steadily losing ground to oil rigs since prices peaked in 2008.

What boggles my mind is the lack of consumption in response to incredibly low natural gas prices. As the price of natural gas has fallen from a peak of roughly $10 MMBtu in 2008 to a low of about $2 MMBtu earlier this year total consumption in the US has been nearly flat. Assuming the second half of 2012 matches the first, we can expect total natural gas consumption in the US to reach just under 25,934 billion cubic feet. That is an 11.4% increase over 2008′s total consumption, which seems like a lot until you consider that the price of natural gas fell about 500% during that same period.

In the US, the biggest increases in natural gas usage are coming from electricity generation while vehicle usage has sadly remained flat.

The demand for natural gas in the United States might be stuck in the mud, but globally the usage of natural gas is blowing up. This is largely due to the popularity of using compressed natural gas as a vehicle fuel. Toyota (TM), General Motors (GM) and other automakers produce versions of their vehicles with factory installed compressed natural gas tanks and gasoline. The gasoline is used sparingly to provide power when the driver steps on the accelerator and the much cheaper natural gas makes cruising very inexpensive.

In addition to factory production models, retrofitting a gasoline vehicle with a CNG or liquefied propane gas tank can be done for less than a thousand dollars. In Thailand, where I spend most of my time, the cost of retrofitting a vehicle to run on CNG is recouped after driving about 10,000 km; consequently demand for natural gas in Asia is wildly outpacing that of the US.

Popular passenger vehicles that run on both compressed natural gas and conventional gasoline are widely available, and popular throughout Asia.

The US should eventually catch up to the developing world’s usage of CNG vehicles. In the meantime I think the best opportunities for investors to profit from advanced natural gas extraction techniques in the US will come from exporting liquefied natural gas.

Unfortunately the amount of natural gas exported by the US will remain right where it is until after the November elections. Many state lawmakers are pressing the Obama administration to allow more natural gas to be liquified and shipped overseas. According to Secretary of Energy Steven Chu, the administration is hesitant to allow more natural gas to be exported to foreign countries, like China, because they do not want to be responsible for higher prices at home. I’m sure that they are far more concerned about the Romney campaign distorting a decision to export more fossil fuels as an act of treason. I’m sure that soon after elections, exports of natural gas will be allowed to rise.

Cheniere Energy, Inc. (LNG) is betting the farm on future natural gas exports. Their Sabine Pass Liquefaction project is well underway and a new LNG terminal is to be built in Corpus Christi. So far, Cheniere is the only US company allowed to export LNG to countries without free trade agreements, albeit in limited quantities. India’s largest gas transmission company, GAIL signed a 20 year agreement with Cheniere to buy 3.5 million tons of LNG per year. A lift on export restrictions would almost certainly result in more contracts for Cheniere from India and other gas hungry nations.

Cheniere has had an incredible run up over the last two years. If liquified natural gas exporting restrictions are eased, the run up should continue.

Relying on favorable policy and commodity prices is risky business to say the least. Furthermore, Cheniere has posted negative earnings 5 quarters in a row. If you want to make a bet on Cheniere I strongly suggest a simple call spread. For example:

Buy December 2012 call with a strike of ’16′ (priced at $1.50)

Sell the December 2012 call with a strike of ’18′ (priced at $0.70)

Net debit to start: $0.80

Maximum Profit: $1.20

This trade gives you about a month and a half after the election for the Obama administration to approve, or reject, an increase in natural gas exports. Your upside is limited to $120 per contract, but your risk is limited to only $80 per contract. Even if you hold on to the contracts until the date of expiration you only need a stock price of $16.80 to break even.

original article

_

MAIN FACTS: French oil and gas company Total SA (FP.FR, TOT) said Thursday it signed an agreement with South Korean national company Korea Gas Corporation for the purchase of 0.7 million metric tons per year of LNG from the Sabine Pass Terminal in Louisiana.

The LNG will be lifted following the startup of the Sabine Pass terminal’s liquefaction train 3, which is scheduled for commissioning in 2017.

This agreement follows on from the recent acquisition by Kogas of an interest in the GLNG project in Australia and the execution of a sale and purchase agreement between Total and Kogas for 2 million metric tons per year of LNG.

Total also signed a cooperation agreement with Sabine Pass Liquefaction that will help to further expand the liquefaction capabilities being developed adjacent to the Sabine Pass LNG terminal.

original article

_

Cheniere Energy Partners LP CQP +1.30% is moving ahead with the construction of facilities to liquefy and export natural gas in Louisiana, moving the U.S. one step closer to becoming a major exporter of the commodity.

The company said Thursday it had given engineering contractor Bechtel Oil, Gas and Chemicals Inc. the green light to start building two liquefaction trains at its Sabine Pass, La., import terminal. The first liquefaction train, which will turn natural gas stemming from booming U.S. shale fields into liquid that can be exported overseas, is expected to start operating as early as 2015, and the second train will start six to nine months later, the company said.

U.S. natural-gas producers became victims of their own success when they unleashed unexpectedly massive amounts of the commodity from shale formations, driving down domestic prices. A market glut for natural gas led prices for the commodity to decade-low levels earlier this year; exports could help ease that glut and give producers access to more profitable markets abroad.

The U.S. exports relatively small quantities of LNG to Japan out of Alaska, but the Sabine Pass facility would be the first terminal to do so out of the lower 48 states.

Cheniere, which originally built the Sabine Pass facility to import natural gas at a time when experts perceived there would be shortages of the commodity, began its effort to turn it into an export terminal about two years ago. The company has struck long-term agreements with four global buyers to supply over two billion cubic feet a day of natural gas for 20 years.

“It is a testament to the flexibility of the U.S. markets and institutions that a small company like ours was able to accomplish so much in a short time,” said Cheniere Chief Executive Charif Souki.

Cheniere expects the project to cost about $5.6 billion, funded by $2 billion of equity and $3.6 billion of debt. The effort is backed by private-equity firm Blackstone Group BX +1.46% .

“We are pleased to provide the growth capital to fund the construction of the first LNG export facility in the continental United States, creating thousands of jobs for American workers and providing significant benefits to the U.S. economy,” David Foley, senior managing director of Blackstone, said.

Cheniere is the only company that has received approval from the Obama administration to export LNG to countries lacking a free-trade agreement with the U.S.

Nearly 10 other proposals are pending before the Energy Department, but the agency says it won’t approve any additional projects until it finishes a comprehensive review of the exports’ impacts on the U.S. The Energy Department is expected to complete that review later this summer.

original article

_

Cheniere Energy Partners, L.P. (“Cheniere Partners”) (nyse mkt:CQP) announced today that Sabine Pass Liquefaction, LLC (“Sabine Liquefaction”) closed on a credit facility (“Credit Facility”) that will be used to fund the costs of developing, constructing and placing into service the first two liquefaction trains of the Sabine Pass liquefaction project (the “Liquefaction Project”). The Credit Facility was upsized to an aggregate $3.6 billion and is held by a syndicate of eleven joint lead arrangers and ten additional banks and financial institutions. The closing of the Credit Facility completes the debt financing necessary to construct the first two trains of the Liquefaction Project.

As previously announced, our Board of Directors has made a positive final investment decision (“FID”) for the development and construction of the first two liquefaction trains subject to the closing of the debt financing, funding of the initial equity investment by Blackstone Energy Partners L.P., Blackstone Capital Partners VI L.P., and certain affiliates (collectively, “Blackstone”), and funding of the remaining equity investment by Cheniere Energy, Inc. (“CEI”). Cheniere Partners has now completed the debt financing and has received the remaining $333 million of funding through the purchase of 22.2 million Class B units by CEI. Cheniere Partners will issue a full notice to proceed to Bechtel Oil, Gas and Chemicals, Inc. (“Bechtel”) upon the receipt of initial funding from Blackstone.

The Credit Facility will mature on the earlier of July 31, 2019 or the second anniversary of the Liquefaction Project completion date. The interest rate is LIBOR plus 350 basis points during construction and then steps up to LIBOR plus 375 basis points during operation. Sabine Liquefaction, the borrower under the Credit Facility, will maintain interest rate protection agreements with respect to at least 75% of its senior secured debt.

Société Générale acted as sole and exclusive financial advisor to Sabine Liquefaction in connection with the Credit Facility.

original article

_

With the surge in U.S. shale gas resulting from the new technology of hydraulic fracturing or “frocking” having brought natural gas prices down to around $3 per million British thermal units , the amount of gas needed to generate the same energy as a barrel of oil is now about $13, while West Texas Intermediate oil is trading at $83 per barrel.

Meanwhile liquefied natural gas (“LNG”) is selling in Japan for about $16.38 per million British thermal units, nearly six times the U.S. price.

It only makes sense, then, you would think, for U.S. gas producers to ship gas to Asia and cash in on the differential. Except for a few things.

To transport gas it needs to be converted into LNG, which is natural gas cooled to -162C. The cooling process reduces the volume to approximately 1/600th. This makes it entirely practical to transport gas overseas by specially designed cryogenic sea vessels (LNG carriers).

But there is a problem. The United States currently has no gas liquefaction plants in the lower 48 states. The only gas liquefaction plant currently in existence, built in 1969, is in Alaska, and its owners, ConocoPhillips (COP) and Marathon Oil (MRO) were recently all set to close it down for lack of gas supplies, until ConocoPhillips bought out its partner’s share.

The LNG plant was closed over the winter. Recently the plant has started making shipments again, but long term plans for the LNG plant beyond 2012 are unclear.

In April 2012 the Federal Energy Regulatory Commission (“FERC”) granted Cheniere Energy (LNG) approval to build an export plant for liquefied natural gas at Sabine Pass in Louisiana, the first new gas liquefaction plant in the United States for 50 years. This plant could be ready by 2015.

Cheniere (LNG) will be able to export up to the equivalent of 16 million tons per year of LNG.

The plant will be built in two stages, the first consisting of two production units, or trains, of 4 metric tonnes per annum each, FERC said.

Cheniere has said it working on raising up to $4 billion in debt to help finance construction at Sabine.

Cheniere has already signed firm supply deals with buyers in Spain, Britain, India and South Korea.

Since giving approval for Sabine Pass, the U.S. government has suspended decisions on expanding U.S. gas exports until a study on the price impact on domestic consumers is completed late summer.

Several companies have applied for licenses to export excess domestic reserves to Europe and Asia, however Reuter’s reports:

..Between 40 and 80 billion cubic meters of liquefied natural gas will be exported each year, starting from 2015.

These figures are below some estimates that expect U.S. LNG exports to rise above 110 billion cubic meters by 2020, but (analysts) have said that political pressure could limit export capacities.

“There is a lot of lobbying in the U.S. to limit LNG exports and to instead use the gas to allow the domestic industry to benefit from low energy prices,” (an analyst) told Reuters.

“Petrochemicals and refined products, as well transportation industries that use natural gas, stand to gain from such a policy, and this could change the entire oil balance in the U.S. economy.”

A report this week by Eurasia Group, the New York-based political risk consultancy, said: “Resource nationalism is the biggest political risk to U.S. LNG (exports), with many opponents to exports concerned about the impact on domestic natural gas prices.”

But for political reasons the U.S. may not export large quantities of the gas that has saved its industry and citizens billions of dollars, thanks to plentiful supply and a slump in prices.

“It remains to be seen whether American citizens, who accept the discomfort of the shale gas activity for reasons of energy security and independence, will willingly accept it to benefit the bank accounts of a few exporters, especially as a likely consequence of higher U.S. gas exports would be higher domestic prices,” said Paolo Scaroni the chief executive of Italy’s Eni SpA (E).

Meanwhile energy-hungry India has been asking the U.S., Nigeria, and Qatar to export more oil and gas to bridge its gap between supply and demand

All of this puts Cheniere Energy with its pre-approval for a new gas liquefaction export plant in a uniquely favored position vis a vis the competition.

Cheniere Partners plans to work with Bechtel Oil, Gas and Chemicals,Inc. (a private corporation) to design and construct the liquefaction facilities, using the ConocoPhillips Optimized Cascade® liquefaction technology. This proven process has been successfully deployed at several LNG export terminals around the world, and offers a high degree of reliability and control.

Over the last year, Cheniere has secured the necessary licenses and regulatory approvals for the project, and it has signed contracts with customers who will buy the gas. It has also secured some equity and debt financing.

Here are the numbers.

There is nothing very impressive here. What the company does have is:

1. The only current permit to build an LNG export facility.

2. The site ready for construction.

3. Signed contracts from willing purchasers of LNG

4. Progress on the liquefaction plant project, so far short of full financing.

Bottom line: This is a speculative stock play.

As CBS news reported, analyst Faisel Khan of Citibank rates the stock a buy, but cautions “building the facility to liquefy the natural gas is complicated and expensive. Cheniere still must get final approval for a $2.5 billion loan and find financing for a second phase of the project. Investors worry that Cheniere may not be able to cheaply finance the full project, or manage the complex construction seamlessly.”

Khan says that Cheniere’s stock should rise as financing is secured and construction started. He also suggests that a larger company with lower borrowing costs and experience building major projects could buy Cheniere.

Since there is no dividend at stake, and this is a long term play, I would suggest that if one wanted to get a piece of the action, a bull call spread on the 2014 LEAP options would be an appropriate play.

With the stock currently at $14, the $15/$20 bull call spread for about $1.70 would pay off as a triple-bagger if the stock holds $20 in January 2014.

If the company gets its financing, this looks very likely to pay off, given the unique niche that the company occupies at this time.

original article

_

Cheniere Energy Inc. (LNG) (LNG) won federal approval to build the largest U.S. natural-gas export terminal as drillers who extract the fuel from shale formations struggle to find domestic buyers to absorb a glut.

The Federal Energy Regulatory Commission approved an order yesterday that will let Cheniere build a $10 billion plant adjacent to its Sabine Pass gas-import terminal in Cameron Parish, Louisiana, about 170 miles (274 kilometers) west of Baton Rouge. The Houston-based company said its 91 percent owned Cheniere Energy Partners LP hired eight financial institutions to borrow $4 billion to help fund the construction.

A surge in U.S. shale-gas production has led owners of liquefied natural gas import terminals to propose exports, increasing competition to supply Asia. Ventures in Australia and Qatar sell LNG to Asian buyers at prices linked to crude oil, while Cheniere’s supplies will be tied to U.S. natural gas futures, which have tumbled to a 10-year low.

“Cheniere has been a first mover and a fast mover,” John Hirjee, an analyst at Deutsche Bank AG, said by phone today from Melbourne. “This will potentially help others who are looking to export LNG from the U.S. to use Cheniere as a template.”

The stock has more than doubled in New York trading in a year, even as Standard & Poor’s said Cheniere was close to defaulting for a lack of demand for its gas-importing services.

Lowest in a Decade

U.S. gas futures rose 1.8 percent yesterday to $2.016 per million British thermal units, after touching $1.959 on April 13, the lowest since January 2002. The fuel has lost 87 percent of its value since reaching a record $15.78 in 2005.

“Today’s order finds that the project can be constructed and operated safely and with minimal environmental impacts,” the federal agency known as FERC said in a statement yesterday.

Environmental groups including the San Francisco-based Sierra Club opposed the project, saying converting natural gas to liquid form emits carbon dioxide, which is linked to climate change. Some critics of the plan had also said exporting the gas would drive up costs for domestic users.

Cheniere plans to super-chill the gas and ship it to Asia and Europe, where the fuel sells at a premium to U.S. prices, Charif Souki, chairman and chief executive officer, said in a March 15 interview.

Customers Lined Up

Souki has lined up customers for much of the terminal’s planned export capacity. The clients are London-based BG Group Plc (BG/), Barcelona-based Gas Natural Fenosa, GAIL India Ltd. (GAIL) and Korea Gas Corp. (036460)

Korea Gas, the world’s biggest LNG importer, agreed in January to buy 3.5 million metric tons of the fuel annually from Cheniere. The contract may help the utility buy the fuel at prices about 30 percent cheaper than supplies from Asia, the state-owned South Korean company said in an e-mail today.

South Korea, Japan and Spain are the world’s largest gas buyers, according to the U.S. Energy Department. Japanese utilities were paying $20.87 per million Btus for Yemeni gas in January, more than 10 times current U.S. prices.

International gas prices have soared because of rising consumption by power generators and chemical plants, and to plug the energy gap stemming from the Fukushima nuclear meltdown in Japan last year. Overseas prices haven’t been pressured by the U.S. glut because North American supplies are mostly inaccessible to the rest of the world.

The U.S. Energy Department granted Cheniere a permit last year to export to countries that aren’t free-trade partners with the U.S., a group that includes Japan and Spain. The terminal is scheduled to begin operations in 2015 or 2016.

Funding Arrangements

Bank of Tokyo-Mitsubishi UFJ Ltd, Credit Agricole SA, Credit Suisse Group AG, HSBC Holdings Plc, JPMorgan Chase & Co., Morgan Stanley, Royal Bank of Canada and SG Americas Securities will arrange the $4 billion in borrowings announced yesterday, Cheniere Energy Partners said.

Cheniere on March 14 announced a stock offering, the fourth in less than a year, and it is negotiating a $2 billion pledge from Blackstone Group LP (BX) (BX) to cover costs of the export terminal.

The Sabine Pass export facility was backed by Louisiana lawmakers including Senator Mary Landrieu, a Democrat, and by General Electric Co. (GE) (GE), which will make equipment for the plant.

Cheniere is planning another export facility near Corpus Christi, Texas, which may begin operating by 2017 or 2018, CEO Souki said.

North American LNG

Aside from Cheniere’s Sabine Pass project, other pending export venture include Freeport LNG Development’s proposal for a plant at Freeport, Texas. Seven companies, including Freeport, are seeking U.S. Energy Department’s permission to export to non-free-trade agreement nations.

Apache Corp., the second-largest U.S. independent oil and natural-gas producer by market value, said last month it’s moving toward a decision to go ahead with its Kitimat LNG project in Canada this year.

“The dawn of North American LNG has arrived,” Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co. said in a research note today. “We expect Sabine Pass to be the first of several LNG projects to be approved in North America, which will become a major new LNG exporting region.”

original article