Cheniere Energy Shares Plunged: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of liquefied natural gas infrastructure wrangler Cheniere Energy (AMEX: LNG  ) are going up in smoke today, losing as much as 20.8% of their value on about three times the average trading volume.

So what: The heavily debt-burdened company just filed a lawsuit against hedge fund Centerbridge Partners, which claims that a Cheniere subsidiary is in default on its senior debt notes. At issue is a complicated money flow between Cheniere Energy, subsidiary Cheniere Energy Partners (AMEX: CQP  ) , the central Sabine Pass operation, and marketing entity Cheniere Energy Investments, and whether or not such transactions qualify as GAAP revenue for Sabine Pass.

Now what: My head hurts from this shell game of Cheniere entities. I can't tell whether the debt should be repaid immediately (which none of the business bodies can afford) because it's actually in default, or perhaps Cheniere's proclamations of innocence should win the day. But either way, management tells us that the default claim alone is damaging Sabine Pass operations, and financial damage will follow. I sure hope you don't have your entire nest egg hooked into the juicy 9% dividend yield on Cheniere Energy Partners, because this looks like a 50-50 chance of that yield evaporating in short order.

Interested in more info on Cheniere Energy? Add it to your watchlist.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool is investors writing for investors.


Read/Post Comments (19) | Recommend This Article (29)

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  • Report this Comment On March 08, 2011, at 4:54 PM, deberidon wrote:

    Shades of Enron?

  • Report this Comment On March 08, 2011, at 5:09 PM, psl8er wrote:

    Bankruptcy is the only option. Original business model totally flawed.

    Net asset value in serious negative territory.

    Management may be in deep trouble.

  • Report this Comment On March 08, 2011, at 5:20 PM, TMFUltraLong wrote:

    Wait, let me put my surprised face on... :-)

    TMFUltraLong

  • Report this Comment On March 08, 2011, at 6:42 PM, GBSFOOL wrote:

    Let's sort of get a bit more circumspect before reaching conclusions. The note holders, a leveraged buyout and hedge fund, have alledged the issuer of notes, an entity affiliated with CQP, have improperly recognized income in accordance with US GAAP. It is non-monetary default that obviously the company will prevail over. It is one thing to have a default over a debt-to-ebitda ratio, but yet quite another to say the company was reporting its income in accordance with US GAAP. It will be thrown on by the courts and the noteholders may themselves get sued if their lawsuite was negligent. This is a really silly ploy to acclerate notes and after investigation, I am pretty sure the noteholders were short the shares or had puts. It is awful conduct by the noteholders. So, I think the author could have better described what is going one than smearing the company without knowing what is going on. It took me two minutes to read the 8k.

  • Report this Comment On March 08, 2011, at 8:22 PM, TCock2 wrote:

    Thanks GBSFOOL. So, what do you really think the outcome may be and the timing of such?

  • Report this Comment On March 08, 2011, at 8:31 PM, RLAprof wrote:

    Interesting that GBSFOOL has no history, no pics, no info.

  • Report this Comment On March 09, 2011, at 3:39 AM, GBSFOOL2 wrote:

    In response to the post above. I don't ever post on Motely Fool. Last night ws the first time that I posted. My name is Ben, and I decided to post as I was an investor in the shares and purhcased some calls before the 8k and 10K were filed. So, I decided that I would look into why this sell off occured and what triggered it. The Motely Fool reporting was an exciting headline that doesn't really address the issue that was easy enough to read in the 8k. As I wrote above, the company received a letter on Feb. 15 from the noteholders, a hedgefund, the company was in default of its notes for a reporting requirement. The letter alledged that CQP did not prepare its financial statements in accordance with GAAP. I just find it hard to believe that there is a serious issue on its hands having received the letter of Feb. 15 and then disclosing, as they are allowed to do, with the 8k. So, I think it is red herring and the inference from the Motely Fool auther is wrong. The company's auditors are Ernst & Young, and it just seems unlikely that they would have been guilty of an improper accounting scandal. It is very unusual for a lender to default for this type of reason, as it is technical matter that needs to be proved to a judge. I don't know why the note holders would have tried to accelerate the notes in this manner and it just doesn't seem logical that they would have done this. So, my gut instinct it is non-issue that the retail investors reacted too. The put/calll ratio was higher than normal ta 1.43:1 based on yesterday's volume and the open interest put/call ratio was a scant .49:1. The reason the volume put/call ratio increased was due to the a huge number of puts purchased for March. The short interest was modest and increased to 977,100. There was nothing sinister expected by the options market and even the short seller were modest. So, I am afraid the reporter from Motely Fool did not ready the 8K and look at the data that a novice investor like me can utse and read very easily. It is a shame that Motely Fool is allowed to post these articles. It is irresponsible and harmful journalism.

  • Report this Comment On March 09, 2011, at 5:49 AM, TMFZahrim wrote:

    @GBSFOOL2, that 8k was the only place you could find any news at all on LNG yesterday, so of course I read it. The "retail panic" theory is interesting, but 17m shares trading hands exceeds the non-institutional holdings in this stock by about 5m. Either *every* individual investor panicked, and some bought the stock to sell it again later in the day, or the big boys followed the trade in rather large quantity as well. Option B sounds a lot more plausible.

    I do appreciate your take on the situation. Cheniere's many faces scare me, because following all the connections around is making me dizzy. It's the kind of structure you'd set up if you had something to hide, in my humble opinion.

    Anders

  • Report this Comment On March 09, 2011, at 7:04 AM, TCock2 wrote:

    Anders,

    As a stock holder that didn't panic (yet) I may agree with your "option B". It amazes me that while this is going on, other sites and articles are highlighting LNG for its potential and its Free Cash Flow position.

    While I understand you being dizzy, the structure of Cheniere is not so strange. Many companies are set up in a similar manner in for various reason including local P&L responsibilities and the competition that such generates, as well as being able to identify pros/cons with a business unit more easily.

    I also agree with GBSFool2's comments regarding Motley's articles sometimes. And, this one falls into that concern as well. I do think that you contributed to the panic here with your spin on bad or incomplete information. That is irresponsible.

    Think about it - a hedge fund sites that Cheniere is practicing funny accounting - in a letter?? Based on my experience, a letter is pretty soft for such an acusation, don't you think? Kind of secretive and with hidden motivations???

    Cheniere is taking proper action - legal and open for all to see. Business plan intact and FCF still flowing is it not? Maybe a bit optimistic, but I will not be surprised to see the stock get back to 8 by the end of the week and back on track to reflect such.

    Tony

  • Report this Comment On March 09, 2011, at 7:54 AM, GBSFOOL2 wrote:

    I don't know what else I can add to Tony's comment. One share can trade quite a few times, but I appreciate that fact that the institutional holders might also be selling. According to www.shortsqueeze.com, there were 977,100 shares sold short of 6.47% of the float. The total shares outstanding are 161,330,000; the float is 15,100,000. So, TMFZahrim is correct about the number of shares trading exceeding the float. He is also correct to be upset that only place this came up is in the 8K. There should have been an earlier disccussion.

    However, I don't think this is the time to start ripping part the legal structure, as it was not the reason for the default.

    I still find it to be incredulous type of allegation to pursue a note issuer under. I have been banker for most of my life, and if I were the note holder and I had a chance to pull the trigger on a non-monetary default for failure to adhere to GAAP, I just don't see me pulling that trigger. It is hard to prove.

    Not only that, if then noteholder is negligent and has no backing for the claim, then they will face a counter lawsuit that will exceed the note value. So, it is absolutely lunacy to take something like that on when there are innocement shareholders involved. They might have some right to protect their interests, but they were not at risk. There were questions about the revenues that could have been dealt with. However, the company nmade it clear the accounts are audited by Ernst and Young and there is not such reason to default the notes.

    I am completely upset with the fact the letter was held from dislosure; that much they should have dealt with. I certainly have emailed IR about why they did not table that letter to the shareholders sooner than wait for the 8k and 10K process. So now flipping sides to the shareholder, there really can't be anything in these allegations or they will face the ire of the shareholders (certainly the ones that bought after the date of the letter have a legitimate claim).

    In summary, while I know it looks lke castles in the sand and I am not going to comment on the legal structure. The market has known the structure for a long time and no one was complaining.

    You have to focus on the issue at hand, which is the reasons that this instability was created. It was not contrived to be sure since no one seemed to know about it outside of the company and on the trading floor. The reaction was severe so it does tell me institutional or retail, the panic was created and then manipulated during the day.

    Best to wait for the facts on this and the author was irresponsible to post this article without reading the 8K and providing the reason for the default. Let's put it this way, the note holder is collecting its payment and the demand for payment will not occur without a long court process. Meanwhile, the dividends will be paid. This issue will hang over the company for awhile, but what I want the company to do is work to get itself out this predicament. Unfortunately, when a bully decides to throw its wait around, then they will (and we) will have take a few hard punches.

  • Report this Comment On March 09, 2011, at 8:56 AM, TCock2 wrote:

    Bravo GBS!

    Just to add to your desire to have seen an earlier disclosure, maybe. After all, they did disclose their actions as required to satisfy the SEC. And, while earlier the better, in consideration of their confident position they letter is without merit, then I don't look at as being a big deal here.

  • Report this Comment On March 09, 2011, at 12:00 PM, GBSFOOL2 wrote:

    It is absolutely the case of mispriced risk. It should not be priced at yesterday's level. Had I been watching it yesterday. Today, I waited for the climb up, the drop back and now have doubled down on the calls. I am not sure whether I want to mess with more shares right now, but it has crossed my mind. This is arbitrage at its best. It also helped to have Citi upgrade it as well. Sometimes, you have to consider the details, and these Motely Fool guys and Alpha guys too, go on instinct and gut, not the underlying issues. Shame the guy didn't offer better advice. Buy it when it falls for now reason.

  • Report this Comment On March 09, 2011, at 6:20 PM, SLVtraderX wrote:

    Very few smart invstors here. Let me inform you. GBSFool is true to his name. Cheniere is committing ACCOUNTING FRAUD. The

    Motley Fool probably suspects this but cannot come out and say it just yet for obvious reasons. Do you know what is going on here? None of you do. You calim you read the 8-k and that it absolves them of violating GAAP, but do you know WHY Centerbridge is alleging default on the debt? Because Cheniere has violated certain covenants that are explicit in its bond indentures it IS in violation, and therefore Centerbridge has the right to recall. In addition, and even MORE DAMNING, is the fact that "sabine Pass" is receiving its revenue from "Cheniere Energy Investments" both of which are wholly owned subsidiaries of Cheniere Energy Partners LP (CQP). The "revenues" are just being shuffled back and forth between wholly owned subsidiaries. This is FRAUD. Looking to Ernst and Young and their other auditors for reassurance is fruitless. Accounting firms have shown time and time again that they will bend over backward to accomodate clients committing the most egregious frauds, many times because it would raise questions as to WHY the accounting firms had not caught the fraud in the past.

    I repeat, this is ACCOUNTING FRAUD and AT BEST will result in a 0.01 stock price. If you are in this stock, get out. Go and do a forensic analysis of the financial statements, not just believe the smoke the management team is blowing up your ass. The lawsuit is to buy time to get their hands on some more cash to sustain their musical chairs operations.

    Leave the serious analysis for the big boys kids. Andres Bylund - anything to add? Go ask one of your smarty pants buddies to look into this and they will tell you what's up.

    The big boys know what's up that's why they were selling the piss out of this stock

  • Report this Comment On March 10, 2011, at 10:11 AM, TCock2 wrote:

    OMG - who are you SLVtraderX?! You establish an account just yesterday to jump in this discussion and make such claims without any credibility given...

    Perhaps you work for Centerbridge? Were you the person that sent the letter? Or do you have other positions in LNG/Cheniere that you are trying to drive down???

    Help me out here please. in your post, you state that we should "Leave the serious analysis for the big boys kids. Andres Bylund - anything to add? Go ask one of your smarty pants buddies to look into this and they will tell you what's up."

    So, if I follow your advise and look at other "professional commentary" such as that from Citianbank, Dow Jones, Bloomberg, The Street, and even Seeking Alpha...

    http://seekingalpha.com/article/257195-squeeze-ideas-highly-...

    Funny, your username reminds me of SNL Darth Vader the trader.

  • Report this Comment On March 10, 2011, at 10:20 AM, TCock2 wrote:

    Oops, missing text.

    So, if I follow your advise and look at other "professional commentary" such as that from Citianbank, Dow Jones, Bloomberg, The Street, and even Seeking Alpha... (follow link to see article on FCF) and follow the advise of the professionals then my conclusion would be Andres (and you) are still wrong.

  • Report this Comment On March 10, 2011, at 12:40 PM, GBSFOOL2 wrote:

    Accounting Fraud! That is not what is being alledged at all. You are way over the top with this statement. If it were accounting fraud, the SEC would be investigating this.

    You are not circumspect in your views here and you don't seem to understand the interplay between how a non-monetary default, failure to comply with a reporting covenant plays out. It could be just prefer to bully your view forward by just saying it is accounting fraud.

    I guess, I am not just not as clever as you are, but I do know that Ernst & Young and the company filed the appropriate documents and many people have had an opportunity to review the audited accounts, the 8K and the allegations.

    Moreover, I checked with S&P and thay have not changed their ratings, The company is rated B+ and the notes are rated 3. So, no change there.

    Citi and other analysts upgraded their ratings yesterday and Citi suggested the default is dubious.

    So, yes you are on some levels right to be so asservative about the rights of bond holders, but these are senior secured notes, but then you knew that didn't you. You also make reference to other provisions of bond documents.

    Now, please enlighten us as to how Motely Fool has more detailed information on why this fraud than S&P, the SEC and Citi. How could that be? No, I am afraid, the article just plain didn't get into this as far as I have. Do you know that the LNG has filed a lawsuite against Centerbridge in Texas?

    Have you ever been through the process of proving that a company has not filed its financial statement in accordance with GAAP? No, I suspect not.

    Here is how it will work. Said default and demand has been made. The company has separately filed a law suit and most certainly will deny the default. Then Centerbridge has a choice to make. Do we take this to court to enforce the demand? Which court, The rocket docket or a local jurisdication. Well, LNG was smart they put the case in a Texas court, so that may well be where Centerbridge has to prove the default. Now, how can they prove the default. They have to depose the Finance Director, go throught discovery, depose Ernst & Young, go through more discovery, etc. If they were somehow succsessful, it would take over one year if not longer to prove it. Meanwhile, Centerbridge has ruined the company's access to the public capital markets and has hurt some big shareholders. In addition, to LNG suiing them others will pile in.

    No, I am afraid that if you are going to where the bondholders hat, you need to where the noteholders hat and then consider what is at stake.

    This won't go far at are. Oh, buy the way, the CQP shars are up again. $17.25 on a bad day on low volume.

  • Report this Comment On March 10, 2011, at 12:54 PM, TCock2 wrote:

    Wow, GBS, thanks for the added text.

    I was trying to keep it simple for SLV as I was not sure he would understand it all.

  • Report this Comment On March 12, 2011, at 3:20 AM, SLVtraderX wrote:

    i made a mistake. Accounting isn't my strong suit. What can I say I have megalomaniacal tendencies... Didn't lose that much on the puts =/

  • Report this Comment On March 14, 2011, at 12:08 PM, TCock2 wrote:

    SLV, apology accepted.

    Cheniere is in the clear and all is well!

    Please be more careful next time and base your comments on facts. Leave opinion for... opinion.

    Thanks.

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