The global LNG trade is a megatrend that's just getting started. According to energy research analysts at Wood Mackenzie, LNG demand is expected to double from 2015 to 2030, which has the potential to fuel tremendous growth for pure-play LNG producer Cheniere Energy (LNG -0.83%) and its affiliate Cheniere Energy Partners (CQP 0.10%).
If you're going to choose the better way to invest in the global LNG trade, parent company Cheniere Energy is the clear choice between the two. Here's why.
Higher fees flow upstream
The Cheniere organization is made up of three publicly traded entities: the aforementioned Cheniere Energy and Cheniere Energy Partners, as well as Cheniere Energy Partners LP Holdings (NYSEMKT: CQH). Of the three, Cheniere Energy stands atop the organizational structure, which is shown on the slide below:
That place at the top is noteworthy because it means that Cheniere Energy is the recipient of fees paid by its various entities, in addition to any income earned from the assets it directly controls.
Let's put this in perspective. As that slide notes, Cheniere Energy Partners derives the bulk of its income from its three operated assets: Sabine Pass LNG, Sabine Pass Liquefaction, and Cheniere Creole Trail Pipeline. However, it doesn't get to keep all the income earned by those assets. Instead, it passes 2% off the top to its general partner Cheniere Energy GP, which is directly controlled by Cheniere Energy.
Further, it pays its GP incentive distribution rights, which is a percentage of the cash flow that is available to distribute to its investors, including Cheniere Energy Partners LP Holdings, another entity that is partially owned by Cheniere Energy. It's a complex arrangement, to say the least, but the bottom line is that Cheniere Energy earns a larger portion of the cash flow generated by Cheniere Energy Partners than its individual investors.
In addition to collecting a higher percentage of the cash flow generated by Cheniere Energy Partners, Cheniere Energy owns additional assets, which provides greater diversification. Currently, the company owns Cheniere Marketing, Corpus Christi Liquefaction, and other developmental assets.
Corpus Christi Liquefaction is the most-noteworthy asset because it's the company's second LNG export development. Once that facility comes online, it will provide the company with not only growth, but diversification benefits that Cheniere Energy Partners doesn't have, given that it's basically a one-asset company, with Sabine Pass Liquefaction being its major asset.
This matters because, if something were to happen to Sabine Pass -- say it was damaged by a hurricane -- this could significantly impact the income earned by both Cheniere Energy Partners and Cheniere Energy Partners LP Holdings. Cheniere Energy, on the other hand, could potentially still earn income from Corpus Christi, assuming it was up and running at the time.
Cheniere Energy has visible upside due to its 100% ownership interest in Corpus Christi Liquefaction, which is expected to come online in late 2018. That additional upside is not yet available to Cheniere Energy Partners investors. While it's possible that the asset could potentially be dropped down, that's not something investors can bank on because Cheniere Energy could continue to hold it, or create another publicly traded entity to own and operate that asset.
In addition to that visible upside, Cheniere Energy has other wholly owned projects in development that could drive growth in the years to come. These include potential domestic gas-pipeline infrastructure opportunities, as well as international infrastructure investments where Cheniere would be the LNG supplier.
Further, given the projected shortfall in LNG supplies after 2020, there's the potential that Cheniere could develop or acquire additional LNG assets. In other words, all future growth would first be developed at Cheniere Energy, not at its publicly traded affiliate.
Bottom line, when choosing between Cheniere Energy and Cheniere Energy Partners, it's clear that the parent company is the better option. Not only does Cheniere Energy earn a greater percentage of the income produced by Cheniere Energy Partners, thanks to the organization's fee structure, but it has greater diversification and upside potential.