Energy Transfer (ET +0.43%) has been trying to convert its Lake Charles terminal to a liquefied natural gas (LNG) export facility for years. It has faced a series of setbacks, including challenging market conditions, the loss of a key partner, and regulatory issues. However, despite all those problems, it continues to press on with the project.
It recently secured three more contracts supporting the proposed export facility. That puts it another step closer to approving the project, which would boost its future cash flows to support its 9.5%-yielding distribution to investors.
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Details on the deals
Energy Transfer has signed three non-binding agreements to sell LNG from its proposed Lake Charles export facility in Louisiana:
- A 20-year contract with a Japanese consortium for 1.6 million tons per year.
- A 15-year agreement to liquefy natural gas for Chesapeake Energy. The U.S. natural gas producer will then sell the 1 million tons of LNG per year to Swiss commodity trader Gunvor during the life of the contract.
- Another 15-year, 1 million ton per-year contract with an undisclosed U.S. customer.
The deals add up to 3.6 million tons annually, about 22% of the 16.5 million tons per year proposed capacity for the Lake Charles LNG project. They add to the list of deals supporting the proposed facility. As of last August, it had signed contracts covering nearly 8 million tons per year, or nearly half of its planned capacity.
These latest agreements put the company closer to making a final investment decision for Lake Charles. The project would take about four years to build and cost around $13.2 billion. Energy Transfer is hoping to bring on at least one financial partner to help bear some of that financial burden after Shell abandoned the joint venture a few years ago. However, Shell rejoined the project in a different capacity by signing a 20-year, 2.1 million LNG purchase agreement with Energy Transfer last year.
A huge hurdle to overcome
While Energy Transfer hasn't yet approved construction, it has already invested significant money in the project. It has spent around $350 million in initial development costs. It has also spent a lot of time securing all those commercial agreements.
However, it might never get the chance to recoup its investment. The Department of Energy recently refused to extend its export permit for another three years. The current authorization expires at the end of 2025, which isn't enough time to finish the project. The company has needed additional time due to unplanned delays and shortages of the equipment needed to build the project.
The Department of Energy believes Energy Transfer has had enough time to complete the project. However, Energy Transfer disagrees. It experienced a setback due to the pandemic, which reduced demand for LNG and caused supply chain issues. In addition, the company wanted an extension to include a variation in the design to include a major carbon-capture and sequestration component. That addition would reduce the project's emissions, making it more environmentally friendly.
A potential needle-moving investment
Energy Transfer continues to push forward with Lake Charles because it would be a meaningful growth driver. While the company would sell off a large stake in the project to investors to help fund the development, it would still earn incremental income from its remaining interest in the future facility. In addition, it would "realize significant incremental cash flows from transportation of natural gas on our Trunkline pipeline system and other Energy Transfer pipelines upstream from Lake Charles," according to comments by co-CEO Tom Long on the company's third-quarter earnings call.
Those future cash flows would give Energy Transfer more money to support and grow its distribution. The company currently plans to increase its 9.5%-yielding payout by 3% to 5% per year. Lake Charles would help give it the fuel to continue growing that payout over the longer term. Because of that, it remains a key project for investors to watch.
