LNG Deal May Give Cheniere a New Lease of Life

I find myself saying this over and over, but there's no other way of putting it, so here it is again: The natural gas sector is bustling with activity.

There are three reasons why: Huge resources of natural gas are being discovered in places like Australia, Qatar, Malaysia, and even the U.S. (Marcellus shale); it is the cleanest of all fuels when burned; and there's enormous demand for liquefied natural gas in Asia. The last two reasons are somewhat related. The Japan nuclear disaster not only created demand but has also turned the world's focus on safer ways of fulfilling energy needs -- more on this later.

Now let's talk about the latest buzz. Cheniere Energy (AMEX: LNG  ) has entered into a contract with the BG Group to supply LNG through its Sabine Pass Terminal project, owned by its subsidiary Cheniere Energy Partners (AMEX: CQP  ) . The deal is the first step toward opening the door for U.S. producers to European and Asian LNG markets, where they can take advantage of both higher demand and price.

The deal with BG is to supply 3.5 million tons per annum, or mtpa, of LNG for 20 years. The facility is authorized by the U.S. Department of Energy to export up to 16 mtpa of LNG to all countries with which trade is allowed. This will provide Cheniere the opportunity to enter into more LNG supply agreements.

What the deal means to Cheniere
Cheniere has been reeling under a debt burden of about $3 billion, including a loan of $298 million that is due in seven months. Add this to about $7.2 billion it would need to build the LNG export facility. It's no wonder then that Cheniere has been looking for finance to build the facility and to refinance its old debt. Finance could be arranged only by securing contracts similar to the BG Group deal. So the arrangement has come as a saving grace for the company. According to Cheniere's CEO, another agreement of similar size and duration with an undisclosed company might come within weeks.

From import to export
Cheniere took on a lot of debt to build an import terminal for regasification. The terminal was built to pump gas to the major U.S. demand centers. But improvement in drilling techniques made extraction from unconventional areas feasible and created a glut of supply. This resulted in a decline in natural gas prices in the U.S., with imports incurring higher costs.

This, along with demand for natural gas in the European and Asian markets, instigated companies like Cheniere, Royal Dutch Shell (NYSE: RDS-A  )  and Apache (NYSE: APA  ) to announce plans to convert import terminals into export facilities.

What it means for the industry
With more export facilities, excess natural gas produced in the U.S. can be transferred to international markets. There is a huge difference in the price of natural gas in the U.S., Asian, and European markets. The U.S. natural gas price is currently a quarter of that in Asia and about half the price in the U.K. This presents a good chance to arbitrage and sell U.S.-produced gas to European and Asian markets at a handsome profit. The deal also presents prospects for companies like ExxonMobil (NYSE: XOM  )  and BHP Billiton (NYSE: BBL  ) , which have put a lot of money into the U.S. shale gas market. ExxonMobil is the largest natural gas producer in the U.S., and BHP has been spending heavily in the U.S. shale gas business, with investments of more than $4.75 billion after the acquisition of U.S. shale gas group Petrohawk Energy.

Burgeoning demand
Demand for LNG is rapidly growing, especially in the Asian markets as a result of environmental concerns and the Fukushima Daiichi nuclear plant incident. Japan is the largest importer of LNG, followed by South Korea. The demand for LNG is also expected to increase five times by 2020 in India and China.

The deal raises Cheniere's hopes against competitors like Chevron (NYSE: CVX  ) and ConocoPhillips (NYSE: COP  ) , which have already built their base in Australia to tap the Asian markets.

Foolish takeaway
Provided Cheniere can secure the finance for building the facility and refinance its present debt, it can provide a new direction for the U.S. natural gas industry. New markets with higher demand for LNG and higher profit margins can be tapped. If you're looking to tap in to natural gas profits, I invite you to check out "One Stock to Own Before Nat Gas Act 2011 Becomes Law." You can download this special report from The Motley Fool by clicking here.

Fool contributor Abantika Chatterjee does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Chevron. Try any of our Foolish newsletter services free for 30 days. 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 has a disclosure policy.


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