Energy Transfer (ET 1.54%) has a long history of developing infrastructure projects to support growing energy demand. The company has built thousands of miles of pipelines, multiple oil and gas processing facilities, and several storage and export terminals over the years. The master limited partnership (MLP) currently expects to invest upwards of $2.1 billion this year in expanding its energy infrastructure network.
In addition to those projects it currently has under construction, Energy Transfer has several more in the pipeline. One of those is Lake Charles LNG, a proposed project to convert the existing LNG import and regasification terminal into an LNG export facility. The company has been working on bringing this project to fruition for years. That perseverance looks like it's about to finally start paying dividends for investors.
Image source: Getty Images.
The long and winding road
Energy Transfer and its then-partner BG Group initially received regulatory approval to build and operate a natural gas liquefaction and export facility in Lake Charles, Louisiana, in late 2015. They expected to make final investment decisions (FIDs) in mid-2016 and start construction shortly after that, putting the partners on track to export LNG by the middle of 2020. The project would have featured three LNG trains capable of producing about 16.5 million tons of LNG per year, which would have been one of the largest LNG export facilities in the country at the time.
Unfortunately, because of turbulence in the oil and gas market, Energy Transfer never signed enough contracts with LNG buyers to support the investment. Those market conditions led BG Group to merge with Shell (SHEL 1.46%) in 2016. While Shell initially continued working with Energy Transfer to push the project to the finish line, it pulled out in early 2020, when market conditions took another nosedive, giving Energy Transfer sole control of its development.
Instead of giving up, Energy Transfer continued to press on with the project because it believed it was one of the most competitive and credible LNG projects on the U.S. Gulf Coast. The company noted that it would continue to evaluate alternatives to advance the project, including bringing on new partners and reducing its size from three trains to two with 11 million tons per year of LNG capacity.
The catalyst it has been waiting for
Energy Transfer's decision to continue pursuing the project now appears poised to pay off. Russia's invasion of Ukraine has upended the global energy markets by disrupting the flow of natural gas into Europe, and energy security has moved to the forefront. That's leading more countries to lock up natural gas supplies by signing sales and purchase agreements with proposed LNG export projects. So far this year, Energy Transfer has signed the following contracts:
- Two 20-year sales and purchase agreements with ENN Energy Holdings limited for 1.8 million tons and 0.9 million tons of LNG per year. ENN is one of the largest independent energy companies in China.
- A 20-year agreement with Gunvor for 2 million tons of LNG per year. Gunvor is one of the world's largest independent commodities trading houses.
- An 18-year deal with SK Gas Trading for 0.4 million tons of LNG per year. SK Gas is building an LNG import terminal in Korea.
Overall, Energy Transfer secured contracts covering 5.1 million tons of LNG per year. Meanwhile, CFO Tom Long stated on the company's first-quarter conference call: "We are also in active negotiations with a number of other high qualified customers, and we expect to make an announcement of additional offtake agreements in the weeks ahead."
The CFO further stated:
We expect to finance a significant portion of the capital cost of this project by means of the sale of equity in the project to infrastructure funds and possibly to one or more industry participants in conjunction with the LNG offtake agreements. We are currently targeting FID for this project in the fourth quarter of this year. Recent events in Europe highlighted the importance of LNG from the United States, a country with abundant natural gas supply and strong geopolitical ties to Europe. We are hopeful that our Lake Charles LNG project will be a significant factor in the long-term solution for global energy needs.
The company's funding strategy of selling stakes in the project to infrastructure funds and industry partners will help reduce the amount of capital it needs to invest in the project. That will free up those funds for other investment opportunities. It will also enable the MLP to continue paying its attractive distribution. Meanwhile, the completed project would supply it with incremental cash flow starting as early as 2026 to further support and grow its distribution.
Patience could finally start paying off
Energy Transfer has long believed that its Lake Charles site would make an ideal LNG export facility. That dream might finally start to become a reality this year. While it needs to secure more customers and some investors, it's confident that it will make an FID by year-end. That would help boost its long-term growth prospects, giving investors more confidence in its ability to continue growing the distribution in the coming years.
