Chances are if you have looked at the boom in natural gas across the United States and have searched for an effective way to invest in that opportunity, you have probably come across Cheniere Energy (NYSEMKT:LNG). The US's bountiful supply of cheap gas means there is ample opportunity to export it around the world and generate some decent profits, One issue you will likely come across when looking at Cheniere as a potential investment is that there are multiple ways to invest in the same corporate entity.
To know whether Cheniere Energy or one if its subsidiaries Cheniere Energy Partners Holdings (NYSEMKT: CQH) is the right type of investment for you. You need to know the company's corporate structure and the different results you can expect from the various parts of the business.
Know what you are buying
The strange thing about Cheniere Energy is that there are three different ways to own the same entity: Cheniere Energy, Cheniere Energy Partners Holdings, and Cheniere Energy Partners (NYSEMKT:CQP). There are some subtle differences between each investment vehicle, though, and to understand how that works you need to be intimately familiar with the company's corporate structure. Here's a breakdown of how that structure looks. The three red circles indicate where each is in corporate structure.
As you can see, Cheniere Energy is the parent of the whole organization, while Chenere Energy Partners and Cheniere Energy Partners Holdings are subsidiaries. These entities are also set up as different types of investments, which makes them more appealing to different types of investors. Here's a quick breakdown of what you get with each and why you might want to own it.
Cheniere Energy Partners:
- What is it? A master limited partnership that owns and operates the company's Sabine Pass LNG export terminal and a couple pipelines that source gas to the terminal. The business will generate steady revenue once the facility is fully operational thanks to the long term supply contracts it has signed with customers. The partnership will pay out a majority of its cash flow in the form of distributions to its owners.
- Why own it? You get a higher yield investment -- 5.8% today -- that is tax advantaged because of the master limited partnership structure. It will be a very steady dividend payer, but there isn't a whole lot of growth built into this part of the business.
Cheniere Energy Partners Holdings
- What is it? A traditional C-Corporation whose sole assets are a partial ownership of Cheniere Energy Partners. Much of the shares that it owns are currently designated as subordinate and Class B shares such that they don't receive cash distributions while the Sabine Pass terminal is still under construction. Once it is fully operational, though, each share Cheniere Holdings owns will receive a full distribution that will immediately be paid out as a regular dividend to the public owners of this stock.
- Why own it? You get the same benefits of owning Cheniere Energy Partners -- steady cash stream, higher yield, but low growth. However, as a C-Corp, the payments you receive are considered dividends instead of distributions. This means they are taxed at the normal capital gains rate and you don't have to do the extra paperwork associated with owning master limited partnerships. You also have no voting rights.
- What is it? The parent organization that has an equity interest in both Cheniere Energy Partners and Cheniere Energy Partners Holdings. It currently owns the company's second LNG export terminal in Corpus Christi, Texas. It also owns the marketing arm of the business that will look to sell any LNG produced from the facilities that aren't already committed to those long term contracts to the open market. The company doesn't pay dividends and likely won't for a while as it pays off debt and develops the second facility. However, from a very long term perspective, there is more growth potential in this part of the business.
- Why own it? You're willing to forego dividends in hopes that the company has a better chance at long term growth with its other investments.
What a Fool believes
Whether or not you should invest in any part of Cheniere Energy has a lot to do with what you think about the future of natural gas in the United States, and Cheniere's ability to export it cheaply abroad. While it has some reasons for hope with its contracts in place, it still needs to prove if it is an effective operator that can keep costs down and generate returns.
How you want to invest in that opportunity can vary on the part of the Cheniere Energy corporate structure you wish to invest, and that comes down more to your personal investing preferences. Between Cheniere Energy and Cheniere Energy Partners Holdings, I would prefer Cheniere Energy Partners Holdings. There, you are a little closer to the revenue stream of the actual assets and you are ensured a return from the dividends that doesn't 100% rely on managements ability to reinvest that capital effectively. I would much rather give up a little extra growth potential for the cash in my pocket sooner.