Energy Transfer (ET) already has one of the largest expansion project backlogs in the U.S. midstream sector. That has enabled the company to increase earnings and cash flow at a fast pace over the past year and positions it for healthy growth in 2019.
More growth appears to be coming down the pipeline. That's after the company formalized a partnership with global oil and gas giant Royal Dutch Shell (RDS.A) (RDS.B) to push forward its Lake Charles LNG project. That puts the company another step closer to making a positive final investment decision on this large-scale project.
Formalizing the partnership
Energy Transfer has been working with Shell for quite a while on converting its existing LNG import terminal in Lake Charles, Louisiana, into an export facility. Tom Mason, the president of Energy Transfer's Lake Charles subsidiary, commented on their relationship during the company's fourth-quarter conference call earlier in the month. He stated:
We were somewhat frustrated with the pace of progress with Shell as our joint development partner on the project, but we've really turned the corner on that front and we've made a lot of progress with Shell... And so I think that will help us move the project forward as well... It's a big project, and there are lots of moving parts to it. But we're pleased with the progress and we think we'll have some developments to announce in the near future. But I think we're looking at hopefully an FID [final investment decision] in the first half of 2020. And we think that's very achievable.
Evidence of that progress came this week when the companies signed a project framework agreement to further progress Lake Charles toward an FID. Shell agreed to become a 50-50 joint venture partner in Lake Charles and will act as the project lead, as well as manage the construction and operate the facility. Energy Transfer, meanwhile, will be the site manager and project coordinator.
The agreement allows both companies to focus on what they do best. Energy Transfer will leverage its extensive natural gas pipeline network to feed the facility with natural gas, which Lake Charles will liquify and then export. Shell, meanwhile, which is one of the world's largest gas producers and a leader in LNG, will leverage its strengths in both areas to market the LNG to global buyers.
Check out the latest earnings call transcript for Energy Transfer.
Timing the market
While progress on this project has been slower than Energy Transfer had hoped, its current timeline couldn't be better given what Shell sees ahead for the global LNG market. As things stand, the project remains on track to start producing LNG in late 2024 to early 2025. That timeline is worth noting, given Shell's view that there won't be enough supply to meet demand by the mid-2020s despite several recent FIDs of new LNG projects, including one by Shell in Canada. Because of that, energy companies need to build additional LNG infrastructure to meet anticipated future demand.
However, while the project appears well positioned to meet a future need in the market, it's well behind others in the development process. ExxonMobil and Qatar Petroleum, for example, announced a positive FID on their Golden Pass LNG project in Texas last month. The more-than-$10 billion facility will have the capacity to export 16 million tons of LNG per year -- around the same as Lake Charles -- when it comes online in 2024. Venture Global, meanwhile, is planning to build two LNG facilities in Louisiana capable of exporting 60 million tons of LNG per year, which is double its initial plan due to strong customer demand. Finally, Tellurian hopes to green-light its $30 billion Driftwood facility in Louisiana in the first half of this year. Driftwood's first phase would produce 27.6 million tons of LNG per year starting in 2023, followed by a second phase three years later.
Overall, a dozen U.S. LNG export terminals are currently in development, which could export upwards of 146 million tons per year. However, Tellurian's CEO believes the industry can only support 100 million tons of additional export capacity, which suggests that companies won't build all the proposed projects. However, given Shell's LNG expertise, it likely wouldn't have taken a leading role in Lake Charles unless it felt confident it could move this project forward. That bodes well for Energy Transfer, which appears poised to add another large-scale expansion project to its backlog to fuel future growth.
Gearing up for the next phase
Energy Transfer expects to invest another $5 billion to expand its midstream footprint this year. That positions the company to grow cash flow at a healthy rate for at least the next couple of years, given that its current slate of expansions should all enter service by the end of 2020. The company could extend its growth visibility much further into the future by giving Lake Charles the green light. That's why investors should keep a close eye on the progress of this potentially needle-moving project.