September 26, 2012
The surge in natural gas production brought on by increases in technology in both hydraulic fracturing and horizontal drilling has depressed gas prices and distorted the oil to natural gas price ratio. While the record low price has greatly affected the top and bottom lines for gas-heavy producers, opportunities are still plentiful through exploring the huge arbitrage opportunity between the cheap North American market and the expensive Pacific Asian market.
Cheniere Energy is one company that is currently building out infrastructure to benefit from the massive supply glut, but it currently has two forces working against it. The company needs to export LNG while the arbitrage situation still presides. With an estimated cost basis currently around $6.50 per thousand cubic feet, time will be in short supply for the company to recoup the massive capital expenditures involved. Another worry facing Cheniere is growing competition throughout the world, which will narrow the price gap as more projects come online. Despite the competition, Cheniere has the necessary permits to export LNG, and with the first shipment expected in 2015, the company still has plenty of opportunity to bring in outsized gains and secured cash flows by agreeing to long-term supply contracts with four Pacific Asian customers. Check out the video below for detailed commentary on Cheniere and the contracts and hedging strategy the company currently has in place.
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