Whenever a company sees shares climb 75% in just over half a year, it's going to get a lot of attention. Cheniere Energy (NYSEMKT: LNG) is no exception. Thanks to a slew of deals the company has signed in the past several months, the company has set itself up well for several years to come. The thing is, sometimes investors don't look deeper into these sorts of situations, because if they did they would probably notice that investing in Cheniere's Limited Partner -- Cheniere Energy Partners -- could be a much better decision than buying shares of the parent company. Let's take a look at why this is the case.
Buying the assets, not the name
To understand why Cheniere Energy Partners may be the better investment for individuals today, you need to understand the corporate structure of the company, which isn't exactly simple. The important takeaway is that Cheniere Energy is the general partner of Cheniere Energy Partners, so the general partner's revenue comes from distributions paid out by the partnership.
By itself, it doesn't seem like a big deal. After all, when you add in Cheniere Energy's total ownership in the limited partner through Cheniere Energy Partners LP Holdings, it's 49%. The issue that makes it a larger consideration is the tricky financial deals that Cheniere Energy has made in order to finance this LNG export project using things like Class B and subordinated units. These special groups of units are a way of minimizing or delaying distribution payments to all shares outstanding until Sabine Pass is up and running.
Of all the shares in Cheniere Energy Partners, only 18.5% of them receive distributions today -- shares held by the public and the general partner interest. Since the Sabine Pass facility isn't operational, Cheniere Energy Partners isn't generating enough cash flow to cover distributions to these units. So it is actually funding these distributions through debt and other sources of nonoperational cash. So those remaining 81% of shares will not receive any cash flow until those distribution debts are paid off, and are only entitled to a partial distribution until Sabine Pass generates enough free cash to give every share outstanding an equal cut.
Why it matters
So you're probably asking yourself, "Why should I care about all of this corporate structure mumbo-jumbo?" The reason is because it impacts the performance of the shares you will own. By owning shares in the limited partnership instead of any of the other entities, you will be entitled to full distribution payments immediately versus the other entities, which will likely not receive full distributions until 2016-2017 when liquefaction trains three and four come online. So by the time that you start to receive an equal return from the other Cheniere Energy investment options, shares in Cheniere Energy Partners will have already paid you almost 11% of your original purchase price today in distributions.
Another thing that makes Cheniere Energy Partners a more compelling investment today is that it's a greater value than Cheniere Energy based on its future. I'm not talking future 12 months, but rather when the Sabine Pass is up and running. Based on estimates from Cheniere's investor presentation and the two entities current enterprise value, Cheniere Energy Partners is a much greater value.
|Entity||EBITDA once Trains 1-4 online (in millions)||TEV/EBITDA using trains 1-4||EBITDA once trains 1-6 online (in millions)||TEV/EBITDA using trains 1-6|
|Cheniere Energy Partners||$2,470||7.12x||$3,630||4.67x|
|Cheniere Energy, Inc||$1,200||21.8x||$1,900||13.78x|
The one thing that could change this thesis is what Cheniere Energy plans to do with its Corpus Christi facility. If it remains under ownership of Cheniere Energy then it will receive direct revenue from that facility, adding about $2.6 billion in EBITDA annually. There is a possibility, though, that it could drop those assets down into the partnership in the future, which is quite common for general partners and limited partnerships. Also, remember that the Corpus Christi facility isn't expected to deliver its first LNG shipment until 2018-2019, so if the Corpus Christi facility is part of your investment thesis, then keep in mind that you are planning on holding onto shares in the company for at least four to five years before reaping that benefit.
What a Fool believes
Cheniere Energy is a very unique investment opportunity since it is the only way to invest wholly in the United States' ability to export LNG thanks to the pricing advantage we have from cheaper domestic supplies. Considering the company has locked up over 88% of the Sabine Pass facility's capacity in 20-year take-or-pay contracts, it looks like the entire company is set up well for the future. Based on the way the company set up with its various entities, though, it looks like an investment in Cheniere Energy Partners is the better investment not just on its ability to generate a return today, but also the long-term value of the stock.
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