Cheniere's Building Its Castle Block by Block

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A company that's been posting losses for the past 13 years usually isn't going to turn things around. But Cheniere Energy (AMEX: LNG  ) may be the exception to the rule.

Is the writing on the wall? Maybe not.
Although Cheniere finished the third quarter in the red with a $53.9 million loss -- bigger than its $40.6 million loss last year -- and reported negative earnings per share, one development might just turn the tables. The company has entered into a contract with Britain's BG Group to supply liquefied natural gas through its Sabine Pass Terminal project, owned by Cheniere Energy Partners (AMEX: CQP  ) . Under the deal, Cheniere will supply 3.5 million tons per annum, or mtpa, of LNG for 20 years. This type of LNG supply setup will be the first of its kind in the United States in more than 40 years.

Many factors -- including depleting oil reserves, environmental hazards, and huge natural gas discoveries -- have made LNG a hot property, and the massive demand from Asia and Europe has thrown oil majors into a tizzy. The U.S. Department of Energy has authorized the Sabine facility to export up to 16 mtpa of LNG to all countries with which trade is allowed, enough capacity to provide Cheniere the opportunity to enter into even more LNG supply agreements.

Cheniere's primary revenue sources are its LNG terminal, natural gas pipeline, and LNG and natural gas marketing businesses. The bi-directional regasification service at the Sabine Pass LNG terminal, which is reserved under two long-term third-party terminal use agreements with Chevron (NYSE: CVX  ) and Total Gas & Power North America, generates most of the company's revenue by itself, but this quarter brought a small decrease in total revenue. In the quarter, though, higher operating costs resulted in a minimal decrease in total revenue, resulting from increased LNG terminal and pipeline development expenses.

The fight back
The BG deal and the U.S. Department of Energy's authorization to export domestically produced natural gas from the Sabine Pass LNG terminal has led to an expansion of the terminal. The export facility will be built for around $7.2 billion, and Cheniere is also looking to build two more LNG terminals. Long-term expansion plans are in place in the natural gas pipeline business, too.

Cheniere is cementing a strong base to capitalize on the booming global demand for LNG. America has become a big source of natural gas -- so much so that production has outpaced domestic demand, creating a supply glut. That's why LNG is fetching a much better price in overseas markets such as Asia and Europe. An export facility like Sabine's fits perfectly into the picture.

Foolish takeaway
LNG is in high global demand, and once Cheniere has the new infrastructure and contracts in place, it might just turn over a new leaf. To see whether Cheniere can cash in, add the stock to My Watchlist. It's free, and it helps you constantly stay updated on news and analysis on your favorite companies.

Fool contributor Amitabha Chakraborty owns no 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 don't 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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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 04, 2012, at 4:36 PM, buzdavis wrote:

    It seems to me there is profit to be made in the companies that get the contracts to do the physical building of these LNG terminals. Can anyone supply any names ?

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