Cheniere Energy (NYSEMKT:LNG) has been busy lately getting its Sabine Pass liquefied natural gas (LNG) facility up to speed. So far, it has been able to complete the first two phases of the development plan ahead of schedule. In the second quarter, the company made significant progress, but it didn't show up in the income statement.
Let's take a look at Cheniere's most recent earnings release and see how far along the company is with its development plan.
By the numbers
|Metric||Q2 2017||Q1 2017||Q2 2016|
|Revenue||$1.24 billion||$1.21 billion||$177 million|
|Operating income||$274 million||$376 million||($76 million)|
|Net income||($285 million)||$54 million||($298 million)|
|Earnings per share||($1.23)||$0.23||($1.31)|
After two straight quarters of astronomical revenue growth, this quarter was surprisingly slow. This quarter, Train 3 at Sabine Pass was fully operational and selling LNG under the company's long-term contracts. However, Cheniere only loaded five additional LNG cargoes compared to the prior quarter. I should note that Cheniere loaded an additional 14 vessels that are in transit and for which it cannot recognize revenue until delivery, so perhaps this was just a small timing issue more than anything else.
Operational income and earnings declined in the quarter compared to the prior quarter as well. Some of that has to do with the loaded but unpaid for cargoes in transit, but the company also noted some one-time losses related to early extinguishment of debt and derivative losses related to some gas futures contracts. These charges aren't of too much concern right now. Most of those early debt extinguishment costs have to do with paying off higher interest debts with borrowings that have lower interest rates. Most of Cheniere's project level debt is now rated investment grade.
Even though the company reported lower operating income, management had enough confidence in the results from the first half of the year that it raised its adjusted EBITDA guidance for 2017 from $1.4 billion-$1.7 billion to $1.6 billion-$1.8 billion.
This was a quiet operating quarter for Cheniere. Train 3 at Sabine Pass went from selling commissioning cargoes to commercial cargoes, and Train 4 began the testing phase, which led to its first commissioning LNG cargo in July. With the commencement of commercial operations at Train 3, Cheniere started supplying KOGAS under its 20-year contract.
The most significant events this past quarter were on the finance and strategic side of the business. Thanks to strong operational performances over the past several months and growing confidence that Cheniere isn't just a speculative bet, rating agency Fitch upgraded Cheniere's Sabine Pass facility to an investment-grade issuer of debt with a BBB- rating.
Cheniere also announced that it had made an equity investment in the Midship Pipeline Company. This company is building an interstate natural gas pipeline from the Anadarko Basin in Oklahoma to the Gulf Coast. With more and more LNG export facilities slated to start operations in the next couple of years, having secure supplies of natural gas is going to be critical.
What management had to say
Here's CEO Jack Fusco on Cheniere's most recent quarter and why he and the rest of the management team feel confident enough to raise guidance for the year.
Today I'm pleased to announce our solid second quarter results, which are once again driven by execution and operational excellence across the company, and an increase in our full year 2017 guidance. The quarter was highlighted by the commencement of our long-term contract with KOGAS and securing equity financing for the Midship Project. Subsequent to the end of the quarter, our long-term contract with Gas Natural Fenosa commenced and first LNG production occurred from Train 4 at Sabine Pass.
We are revising our 2017 guidance upward as our operating results year-to-date have exceeded our expectations, primarily due to LNG trains entering service ahead of schedule and the ramp-up in LNG production levels occurring faster than we'd forecast earlier this year. During the second half of 2017, our focus remains on bringing Train 4 at Sabine Pass online safely and efficiently, executing on our commercialization strategies, and delivering on our increased 2017 guidance.
What a Fool believes
Cheniere Energy's management has done a good job of getting its facilities operational ahead of schedule -- most of that probably has to do with the contractors building the plant, but still -- and keeping those working facilities running at a high rate. The fact that it is netting losses isn't a huge deal right now because Cheniere is still running at less than 50% of its total production capacity. Once the rest of Sabine Pass and Corpus Christi are up and running, Cheniere should be throwing off loads of cash and profits.
The thing investors should be watching for from here on out is progress on its expansion plans. Management has already acquired land adjacent to its Corpus facility and has rigs for land next to Sabine Pass. It wouldn't be surprising if the company announces major expansion plans in the next year or so.