Last quarter, Cheniere Energy (LNG -1.31%) gave a glimpse of what the company will be capable of in the coming quarters as its Sabine Pass liquefied natural gas (LNG) export terminal gets up and running. In the first quarter, it only had two facilities at full capacity, and it's already blowing by analyst expectations.
According to management, though, there are even better times coming down the road. I'm not just talking about the completion of the facilities under construction, but the options the company has beyond that. Here's a set of quotes from the company's most recent conference call that will give investors an idea of those opportunities coming down the pipe.
Image source: Getty Images.
Expansion chances looking good
Earlier in the quarter, Cheniere Energy made a rather large land purchase: 500 acres in Corpus Christi, Texas. It just so happens that plot of land is adjacent to its existing Corpus Christi LNG export facility under construction. It's looking highly likely that the company will be using this land to expand its Corpus Christi facility. According to CEO Jack Fusco, the ability to expand its current facilities should give the company a big leg up compared to other LNG exporters both globally and in the U.S. regarding economics.
We have recently acquired additional real estate positions to enable significant growth at both sites, with the expectation that our existing sites will remain at advantage relative to the Greenfield for the foreseeable future. Second, our operating advantage can be realized through scalability and efficiency gains in operating expenses, given our existing in-place infrastructure. This is true not only at the project sites themselves, but also upstream at the facilities in gas, supply and transportation infrastructure.
Here is the slightly odd thing about this. It wasn't that long ago that Cheniere was embroiled in a proxy war between activist investor Carl Icahn and then CEO Charif Souki regarding growing the company versus returning cash to shareholders. It seems strange that after ousting Souki, who planned to do these expansions, the company still wants to grow.
Either way, Cheniere has a great opportunity here, and it looks like it is taking the initial steps to capture it.
Big marketing opportunity
So much of the original investment thesis for Cheniere was the 20-year contracts it signed with buyers. Those contracts ensured the company would have a fixed revenue stream that is well insulated from fluctuating commodity prices. The rest of the companies production capacity was considered a risk because there was no telling what kind of market there would be to sell LNG on the spot market.
That dynamic is starting to change, though, thanks to floating storage, regasification, and unloading (FSRU) vessels. These ships act as temporary, mobile LNG import terminals that are ideal for places where the economics for a larger, fixed facility don't make sense or where seasonal demand fluctuations may require additional import capacity. According to Anatol Feygn, Cheniere's Chief Commercial Officer, these FSRUs are turning out to be a much more lucrative demand source than originally anticipated.
[W]e believe, floating regasification terminals have been and will continue to be in opening new markets. It's interesting to note that so far, almost 1/4 of the LNG loaded at Sabine Pass in start-up has been delivered to floating regas terminals in 8 countries. That is a significant rate considering that total FSRU capacity is just over 10% of the global regas[ification] capacity in its entirety. So it certainly appears that floating regasification is playing a significant role for us in broadening the range of markets, our LNG accesses.
If demand for smaller, shorter contracts or spot market shipments to FSRUs continue to be such a lucrative market, don't be surprised if Cheniere's expansion plans dedicate a larger portion to these kinds of contracts rather than its long-term, fixed-fee contracts.
Great start to year one of operations
Now that three of Cheniere's LNG liquefaction trains are fully operational and delivering commercial cargoes -- with Train 4 expected to start up by the end of the year -- we are now in full operations mode. As a result, the company's income statement is going to look wildly different than it has in prior years as cash is coming in the door. According to CFO Michael Wortley, 2017 is going to look very good.
Finally, we released consolidated financial guidance for Cheniere at Analyst Day in April. Today, we reconfirmed 2017 full-year guidance for consolidated adjusted EBITDA of $1.4 billion to $1.7 billion. Distributable cash flow of $0.5 billion to $0.7 billion. And distributable cash flow per share of $2.10 to $2.80.
One thing to keep in mind is that distributable cash flow is related to Cheniere Energy Partners (CQP -0.49%), which is the entity that owns Sabine Pass. Parent company Cheniere Energy's revenue and cash flow come from its direct ownership in Cheniere Energy Partners. What is surprising is it was only last year that Cheniere was running perpetual losses and burning through cash. Numbers like this for a few years will help pay off debt and make funding for those expansion plans.
Getting more out of what we have
As more and more LNG export facilities pop up around the world, the margins for LNG are getting squeezed. Granted, Cheniere's existing contract portfolio does ensure a stable revenue stream for its existing facilities, but the competition for its expanded facilities will be much greater. The company does have a leg up against some global players because of low-cost natural gas in the U.S. When stacked up against other U.S. based exporters, though, it will need to be a low-cost operator. When asked about the expansion capacity at Cheniere, Fusco thinks Cheniere's existing facilities will give it a big leg up in that regard.
So as we reiterated, we think Corpus [train] 3, will be the lowest cost LNG expansion project on the Gulf Coast. And so -- and that number is what it would take for us to not only build the Train but also low the ships and process the LNG. So we're not trying to hide anything from the market. If we further expand Corpus beyond Train 3, then we'll have to look at what our needs would be if we needed additional birth or if we need additional tankage. Sabine 6, as you know, Ted, we're just getting 4 up. We'll have 5 about a year after 4, and then Train 5. And then for Sabine 6, and that will give us a lot of operating information on those 2 births, and those 2 loading arms. There are probably incremental improvements we can make on our ability to load faster.
The benefit here is that unlike other facilities that will need to build dock space and all the ancillary assets related to an export terminal. Cheniere thinks it can utilize the existing docks at Corpus and Sabine Pass with minor upgrades rather than entirely new facilities. This means all the company needs to do is build a liquefaction train. As mentioned above, Cheniere has some pretty favorable economics, and this is a huge reason why.
