Can Cheniere Cross All Hurdles?

Cheniere (AMEX: LNG  ) grabbed the headlines when it clinched a deal with the BG Group to export 3.5 million tons of LNG from its Sabine Pass terminal. The news came as a blessing not only for Cheniere, which had been incurring losses for the past 13 years, but also for the U.S. natural gas industry that has a glut of supply. Now, Cheniere has to find a way to manage the steep cost involved in building the export terminal.

Mounting expenditures
Cheniere Energy Partners
(AMEX: CQP  ) , a subsidiary of Cheniere, has hired Bechtel Group to design and build the first phase of the export plant at the Sabine Pass terminal in a contract worth $3.9 billion. After the first phase is completed, the plant will have an annual capacity of 9 million tons. Total cost for the project is estimated to be between $4.5 billion and $5 billion. This will increase the per-ton capacity cost to $555, up by 39% from the company's previous estimates. And the list does not end here.

Cheniere operated an LNG import facility in the U.S., but a glut of supply owing to increased production from shale fields turned it into a loss-making project. Cheniere had to take a lot of debt to sustain the facility and is now reeling under a financial burden. A walloping debt burden of about $3 billion is staring Cheniere in the face, and it includes a payment of $298 million due in May 2012. The company also reported a 19% decrease in cash and near cash equivalents to $131.3 million in the quarter ending Sept. 30. 

The silver lining
The Herculean construction cost, coupled with a dip in cash and near cash equivalents, has brought Cheniere on the verge of default and made it absolutely necessary for the company to refinance its debt, especially for the May repayment. Cheniere is banking on the BG deal to secure refinancing. The other good news for Cheniere is that Chesapeake (NYSE: CHK  ) has agreed to supply 500 million cubic feet per day of natural gas to the Sabine Pass project. So, at least now the company has a solid buyer and a supplier in place, which may instill some confidence in investors.

The enormous demand for natural gas from Europe and Asia, along with higher prices compared with the U.S., offer quite lucrative prospects for U.S. natural gas firms. Behemoths like ExxonMobil (NYSE: XOM  ) and Shell (NYSE: RDS-A  ) (NYSE: RDS-B  ) are already toying with the idea of exporting LNG from their North American operations to these two continents. The bumper LNG supplies in the U.S. have put Uncle Sam on the path to becoming a major LNG exporter.

Foolish takeaway
With the U.S. already having enough reserves -- and thus supply -- to cater to international demand after fulfilling domestic needs, more and more export facilities like Cheniere's are expected to emerge. With Cheniere already building one and sitting pretty with a 20-year contract, it is expected to enjoy the first mover's advantage. The only obstacle in its way is the huge debt burden. I am hoping the company is able to cross it. What say you, Fools?

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Fool contributor Amitabha Chakraborty does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. 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.


Read/Post Comments (8) | Recommend This Article (7)

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  • Report this Comment On November 29, 2011, at 11:25 AM, NattyGuy wrote:

    You mention the BG contract, but what about the second deal inked on November 21, 2012 with Gas Natural Fenosa? Press Release below:

    Cheniere and Gas Natural Fenosa Sign 20-Year LNG Sale and Purchase Agreement

    - Gas Natural Fenosa contracts for approximately 3.5 million tonnes per annum of LNG

    - Cheniere completes customer contracts for the first phase of its project

    - Cheniere will advance towards investment decision to start development of two trains

    HOUSTON, Nov. 21, 2011 /PRNewswire/ -- Cheniere Energy Partners, L.P. ("Cheniere Partners") (NYSE Amex: CQP) announced today that its subsidiary, Sabine Pass Liquefaction, LLC ("Sabine Liquefaction"), has entered into a liquefied natural gas ("LNG") sale and purchase agreement ("SPA") with Gas Natural Aprovisionamientos, a subsidiary of Gas Natural Fenosa, under which Gas Natural Fenosa has agreed to purchase 3.5 million tonnes per annum ("mtpa") of LNG. Sabine Liquefaction is developing liquefaction capabilities to produce 9.0 mtpa of LNG in the first phase of its project at the Sabine Pass LNG terminal owned by Cheniere Partners. This contract with Gas Natural Fenosa is another milestone for the project as Sabine Liquefaction has now reached its contract capacity target of 7.0 mtpa, which is expected to support the construction of the first two trains.

    Under the agreement, Gas Natural Fenosa will pay Sabine Liquefaction a fixed sales charge for the full annual contract quantity and will also pay a contract sales price for LNG purchases based on the applicable Henry Hub index traded on the New York Mercantile Exchange. LNG will be loaded onto Gas Natural Fenosa's vessels. The SPA has a term of twenty years commencing upon the date of first commercial delivery, and an extension option of up to ten years. LNG deliveries are expected to commence in 2016. The SPA is subject to certain conditions precedent, including but not limited to Sabine Liquefaction's receiving regulatory approvals, securing necessary financing arrangements and making a final investment decision to construct the liquefaction facilities.

    "We welcome Gas Natural Fenosa as the next foundation customer for our Sabine Pass liquefaction project. Gas Natural Fenosa is a leading, integrated natural gas and power utility and a significant participant in the natural gas and LNG markets," said Charif Souki, Chairman and CEO. "With this agreement and the previously announced agreement with BG Gulf Coast, LLC, we have reached our contract capacity target for the first phase of our project. We will now proceed towards making a final investment decision in order to start construction on the first two liquefaction trains in early 2012."

    Gas Natural Fenosa is one of the leading multinational companies in the gas and electricity sector. The company operates in more than 25 countries, has more than 20 million customers and has 15.8 GW of installed power. It is the largest integrated gas and electricity company in Spain and Latin America, leading the natural gas sales market in the Iberian Peninsula, and it is the biggest distributor of natural gas in Latin America. With a fleet of 10 LNG tankers, it is a company of reference for LNG/NG in the Atlantic and Mediterranean basins, where it operates 30 bcm.

    Cheniere Partners owns 100 percent of the Sabine Pass LNG receiving terminal located on the Sabine Pass Channel in western Cameron Parish, Louisiana. The Sabine Pass terminal has regasification and send-out capacity of 4.0 billion cubic feet per day (Bcf/d) and storage capacity of 16.9 billion cubic feet equivalent (Bcfe). Cheniere Partners is developing a project to add liquefaction and export capabilities to the existing infrastructure at the Sabine Pass LNG terminal.

    As currently contemplated, the Sabine Pass Liquefaction Project ("Liquefaction Project") is being designed and permitted for up to four modular LNG trains, each with a nominal capacity of approximately 4.5 mtpa. The Liquefaction Project is expected to be constructed in phases, with each LNG train commencing operations approximately six to nine months after the previous train. The first phase will include two liquefaction trains. Commencement of construction is subject to regulatory approvals and Cheniere Partners making a final investment decision. In November 2011, Sabine Liquefaction entered into a lump sum turnkey contract for the engineering, procurement and construction of the project with Bechtel Oil, Gas and Chemicals. Sabine Liquefaction has also entered into two long-term customer contracts for 7.0 mtpa of capacity, which is sufficient to underpin the financing of the first two trains. Cheniere Partners has placed documentation pertaining to the Liquefaction Project, including the applications and supporting studies, on its website located at http://www.cheniereenergypartners.com.

  • Report this Comment On November 29, 2011, at 1:18 PM, richard4850 wrote:

    The smart move for Cheniere would be to through a bankruptcy filing, and get some of the debt from the past wiped out. Not only do they need to take on $4-5 billion of new debt to build and operate this plant until they start receiving revenues but they have a ton of debt taken on to build the import facilities for importing natural gas from the previous business plan.

    I say go into bankruptcy reorganize by writing down some debt, perhaps one billion, then get the creditors to take stock for another billion of debt.

    Of course current investors get wiped out or are significantly diluted which would happen anyway. Any new lender that has to come up with loans is going to require they go out and issue for equity.

    Best time to invest in this is probably 1-2 years from now after a clearer picture develops to see what happens. The way I look at this is $4-5 billion to build the new facility and $2b of current debt. That is quite a bit of debt with no significant revenue to pay the new borrowing for the the 4 year construction period and billions of new debt. They really would need to borrow the financing costs to service that loan over the four years of construction. Add that interest cost to the loan and it is one monster.

  • Report this Comment On November 29, 2011, at 2:02 PM, NattyGuy wrote:

    You take is interesting and valid. It is my hopes that they (Cheniere) make it through so that our great Country can thrive in the energy exportation market. It is my opinion that it is the start of something good and could be a part of this Country's recovery. Putiing a Republican President in place would help too.

  • Report this Comment On November 29, 2011, at 2:22 PM, 102971 wrote:

    What the hell difference would a Republican President make? Would he put up the cash for LNG? Leave politics out of an investment decision.

  • Report this Comment On November 29, 2011, at 3:18 PM, NattyGuy wrote:

    Sorry, but the current administration and "big" government make it near impossible to startup new projects such as Cheniere's with near impossible FERC, DOT and EPA permit aquisition and red tape. And that weighs in heavy on making an investment decision in my opinion for whatever that is worth.

  • Report this Comment On November 29, 2011, at 7:00 PM, richard4850 wrote:

    Just heard the CEO say that they have institutional parties that are interested in lending. Sounds like he believes he can raise $3b in debt and said he would need to raise $2B in equity. Can he really go out and get all that money? Looks like the dilution I was talking about.

  • Report this Comment On November 29, 2011, at 7:06 PM, richard4850 wrote:

    CQP and LNG each have over $2Billion in debt for a total of $4B billion in debt. The CEO says he will borrow, another $3B to build the export facility and sell $2 billion in equity to cover the cost of the first phase of development of the export facility.

    Add it all up and it looks like a lot of equity and debt.

  • Report this Comment On November 29, 2011, at 11:56 PM, markevans007 wrote:

    You mention that LNG has signed a deal for CHK to provide 500,000 mmBtu/d of natural gas supply. I can't find any news or company confirmation on this transaction. What is your source? Any deal specifics you can share with your readers?

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