Most investors in Cheniere Energy (LNG 0.62%) were expecting some modest progress when the company reported earnings. Based on analyst estimates, though, no one was expecting the company to post a net profit for the quarter. That positive net income number looks great on paper, but there are some funky things worked into it that make it look better than it actually is.
Let's take a look at Cheniere's most recent results to figure out how it was able to produce a net profit ahead of schedule and what investors can expect for the rest of 2017.
Image source: Cheniere Energy.
By the numbers
| Results* | Q4 2016 | Q3 2016 | Q4 2015 |
|---|---|---|---|
| Revenue | $571.6 | $465.7 | $68.4 |
| Operational income | $122.4 | $15.3 | ($241.1) |
| Net income attributable to shareholders | $109.7 | ($100.4) | ($291.1) |
| Earnings per share | $0.48 | ($0.44) | ($1.28) |
*IN MILLIONS, EXCEPT PER-SHARE DATA. DATA SOURCE: CHENIERE ENERGY EARNINGS RELEASE.
Yes, after years of promising profits once Cheniere's LNG exports facilities get up and running, the company posted its first net income gain as an LNG export business. Before jumping for joy and expecting these kinds of results in the future, though, there were a couple one time items that gave net income a big boost. Most notably was a $232 million gain from its natural gas derivative contracts. Without those gains, the adjusted net loss would have been $78 million, or ($0.34) per share.
Investors shouldn't hold that against Cheinere, though, because it's pretty clear that the company is making progress toward solid operations and generating profits. This past quarter, Trains 1 and 2 at its Sabine Pass facility were at full operations, and as a result the company loaded 24 cargoes of LNG, up from 15 cargoes in the third quarter. Having both of these Trains up and running at near full speed helps to spread around the high fixed costs associated with the operation of these trains. That's why we got that impressive 800% increase in operational income for the quarter.
One thing to keep in mind is that these are consolidated earnings reports, and most of these current results are from its equity investment in Cheniere Energy Partners (CQP +0.30%), the entity that actually owns Sabine Pass. The parent company won't actually receive cash itself from Cheniere Energy Partners until certain cash flow and payout milestones are met. According to management, Cheniere Energy Partners won't meet those milestones in 2017.
Train 3 at Sabine Pass is currently under commissioning and expects to be in operation this quarter. So we'll likely see a bump in operational costs but marginal revenue gains until that Train is up to full capacity. Train 4 is still on schedule for the second half of 2017.
The highlights
In the third quarter of 2016, Cheniere Energy's management made a lot of financial moves to extend maturity dates of near term debts and take advantage of lower interest rates that are available now that the company has received an investment grade rating. This quarter was very much the same. It paid back several short term borrowings under credit facilities and $1.6 billion in unsecured notes that carried a 7.5% interest rate that were used to fund Sabine Pass. Similarly. it issued about $1.5 billion in 5.875% senior notes to continue construction at its second LNG export facility in Corpus Christi, Texas.
Also, Cheniere completed the acquisition of all shares outstanding of Cheniere Energy Partners Holdings. This was something management was planning to do for a while but the final action was delayed because of negotiations with the board of directors conflict committee. It was able to get around these issues by negotiating individually with the shareholders of Cheniere Energy Partners Holdings.
What management had to say
Even though Cheniere reached a major milestone in achieving a positive net income result, CEO Jack Fusco's statement on the results were pretty matter of fact as the team at Cheniere still have a ways to go.
The fourth quarter of 2016 was another milestone quarter for Cheniere, as today we report financial results driven by nearly a full quarter of LNG production from the first two Trains at Sabine Pass. Transition and execution will remain central themes for Cheniere in 2017, as we expect Trains 3 and 4 at Sabine Pass to begin commercial operations, with Train 3 having produced its first commissioning cargo in January. The financial and operational results we are reporting today reflect our employees' steadfast dedication to execution on our goals.
What a Fool believes
Things are looking pretty good at Cheniere Energy right now. The company is on track to get two more LNG trains up and running at Sabine Pass by the end of the year, construction is staying ahead of schedule at its other facilities that are slated to come online in 2019, and it looks as though it will give the green light for three more LNG liquefaction trains.
Don't be surprised if net income falls into a loss again in the first quarter of 2017 because no one should expect large derivative gains quarter in and quarter out, but don't let that detract you from the progress the company is making.
