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Cheniere Energy Continues to Check Off All the Boxes for Future Profitability

By Tyler Crowe – Mar 8, 2017 at 10:31AM

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It's getting harder to build a bear case against what management is doing at America's first LNG exporter.

For several years, Cheniere Energy (LNG 0.26%) had nothing to report on for its quarterly earnings aside from the progress of its construction. Today, that dynamic has changed as the company has become a major player in the LNG export game. According to management, the transition from a prospective LNG player to an actual one is progressing quite well.

These quotes from its most recent conference call give a decent snapshot of the progress the company has made over the years as well as what investors can expect from here on out. 

LNG liquefaction infrastructure

Image source: Getty Images.

Starting off on the right foot

Cheniere Energy has faced down a lot of doubts and questions over the past several years: Can it get approval to export LNG? Can it find enough buyers interested in its cargo? Can it finance it without going under? Can it construct its facilities on time and within budget? 

So far, the company has been able to answer all of those questions in the affirmative. The last remaining question is whether it can operate its facilities efficiently. Based on the results, according to CEO Jack Fusco, the answer is looking to be another yes:

On the operational front, in the fourth quarter, we produced 24 cargoes at [Sabine Pass Liquefaction] SPL, none of which were commissioning cargoes. For the full year 2016, SPL produced and exported a total of 56 cargoes. Those cargoes aggregate to nearly 200 TBTU [trillion BTU] of gas, and that gas was taken to 17 different countries around the world. We have updated the map located in the appendix for more details. Certainly, we're pleased to be playing a pivotal role in supplying LNG to customers in markets across the globe.

In November, the date of the first commercial delivery, or DFCD, was reached under our fixed-price 20-year sale and purchase agreement with BG Gulf Coast LNG relating to the first train at SPL.

With this question being answered, it's getting harder for doubters to build a case against Cheniere as an operating company and its ability to generate profits. It seems that now the biggest question is how much you want to pay for the company's performance. 

Staying on schedule

So far, Cheniere has done a noteworthy job of bringing its Sabine Pass facility on line within its projected time schedule, especially when this was the first LNG export facility to be built in the US. Now that the first-time jitters are out of the way, Fusco thinks that it can accelerate its timeline on the remaining parts of the facility: 

In December, Train 3 began receiving what we would consider meaningful amounts of natural gas. In mid-January, first LNG production was achieved at Train 3, and the first commissioning cargo was loaded and exported at the end of January. We continue to work together with Bechtel on the commissioning process with the goal of bringing the trains online faster and more efficiently. Our collaboration with Bechtel and the application of lessons learned is resulting in a relatively smooth commissioning process on Train 3 thus far, and we look forward to taking care, custody and control from Bechtel by the end of the first quarter.

The next steps

With the exception of a couple of expansion trains at Cheniere's second LNG facility in Corpus Christi, its growth plans are pretty much set in stone for the next few years. Beyond that, though, things get a little questionable. According to Fusco, the company is already putting together some plans for what will basically be the next decade of growth for Cheniere:

We continue to pursue our evaluation of a mid-scale LNG solution that we introduced to you last quarter. Our consortium of Siemens, KBR and Chart [Industries] are progressing well on the FEED analysis. We're assessing the commercial and regulatory and logistical feasibility and the full-cycle cost profile of a potential project. We look forward to receiving some of the results to that effort over the next several months and we'll communicate more on that to you when appropriate. In that regard, we believe expansion of our existing facilities is far superior to new greenfield development based on the significant investment in site in gas procurement infrastructure. Our focus is to leverage our people, our sites, our gas resourcing capability and know-how to provide the next generation of competitively priced U.S. LNG.

When you consider the infrastructure it will take to move the massive amounts of gas being delivered to these facilities, it makes sense to try to leverage that infrastructure as much as possible. Adding bolt-on LNG trains to existing facilities could help give Cheniere an even larger cost advantage than it already enjoys from cheap U.S. natural gas.  

The market for non-contracted LNG is pretty strong

Much of the investment thesis for Cheniere Energy is built on the company's long-term contracts with customers. Those 20-year take-or-pay obligations cover more than 85% of Cheniere's total liquefaction capacity and should ensure a steady stream of cash to the business. A question has always been whether that remaining percentage of LNG that will be sold on the spot market or on short-term contracts can find a home. Based on the early response from the market, Chief Commercial Officer Anatol Feygi thinks this won't be the risk that some might have assumed: 

The first 2 trains were operating at Sabine Pass for most of Q4 and the profile of delivery destinations from the plant showed the ability of U.S. LNG to be reactive to market conditions. Cargoes loaded from the plants during 2016 between Cheniere and our customers were sent to 17 countries. Asia grew as a destination for Sabine volumes in Q4 as price spreads between Henry Hub and Asia attracted U.S. supply into the Pacific basin. 18 cargoes loaded at Sabine Pass during the quarter, including 10 in December alone, used the Panama Canal to reach customers in Asia or the West Coast of Mexico.

There are a few things still up in the air for spot market demand for LNG over the next couple years as new facilities continue to come on line or ramp up. Questions such as how quickly those facilities get up to speed and how much of a demand response the market will see from big buyers like China will play a large role in this dynamic over the next several years. It's encouraging, though, to see that the company was able to sell all of that cargo on the spot market or shorter-term contracts. Combine that with Cheniere's established base of long-term contracts and things should look pretty good for the company. 

Better the next time around

Cheniere's Sabine Pass facility was its first stab at bringing a facility on line, but it does have another whole new facility slated to start operations in a  couple of years in Corpus Christi. One would assume that starting up a second facility will be much easier than the first. When asked about some of the lessons from opening Sabine and how it will impact start-up at Corpus Christi, Fusco highlighted one element of that plan already in place: 

[SVP of operations] Doug Shanda and his team have done a fantastic job at recruiting and hiring operators and maintenance folks, that in having them report to Sabine Pass to go through, not only our simulator training but also hands-on training with existing trains at Sabine. And we're in the process now of relocating those folks to Corpus, so they will be on the ground early and be very comfortable and familiar with that site.

There's really no better way to improve performance than to have the people on the ground get some hands-on experience. It's encouraging to see things like this happening already at Cheniere, because it should help ensure much smoother sailing from here on out. 

Tyler Crowe has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chart Industries. The Motley Fool has a disclosure policy.

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