Energy Transfer (ET 0.12%) has been working to convert its Lake Charles facility from importing natural gas to a liquefied natural gas (LNG) export terminal for over a decade. The company has faced a series of obstacles while developing the project, including commodity price volatility, the loss of its joint venture partner, and troubles with the regulatory process.
These issues have caused long delays. However, it's reportedly getting close to finding a new partner to help fund the project. While that would be a major positive development, it's not the only obstacle the master limited partnership (MLP) needs to overcome to finally start construction on the project.
A potential partner emerges
Energy Transfer has been searching for one or more equity partners to help fund the development of its Lake Charles LNG project since Shell walked away from their 50-50 joint venture in 2020. While Shell has since signed a 20-year contract to buy 2.1 million tonnes of LNG per year from Lake Charles LNG, it won't invest in its development. The MLP would like to find partners willing to fund more than half the project's cost, which would reduce its capital requirements.
After years of searching, the company is reportedly in talks with Australian energy giant Woodside Energy (NYSE: WDS) about joining the project. Bloomberg reported that Woodside is seeking to buy LNG from Lake Charles LNG. In addition, it's interested in potentially taking an equity stake in the facility as well as others under development in the country.
Reports of Woodside's interest in Lake Charles LNG come shortly after the company abandoned its pursuit of rival Santos. A merger between Woodside and Santos would have created a major global LNG producer. However, with the companies unable to come to terms, Woodside seems to be seeking to partner with U.S. LNG developers to expand its operations.
An unexpected pause
Finding an equity partner isn't the only factor holding Energy Transfer back from making a financial investment decision to start construction on Lake Charles LNG. The Biden administration is another major obstacle the MLP still must overcome.
Last year, the Department of Energy (DOE) rejected the company's request for a three-year extension to finish its Lake Charles project. The company's current approval expires at the end of next year. That's not enough time to complete it, given the roadblocks it has faced. That denial led the MLP to start the process over by filing for a new export license.
Making matters worse, the Biden administration has since announced a temporary pause on granting approvals to new LNG export terminals. The administration wants the DOE to update the economic and environmental factors it uses to authorize these projects. That puts Energy Transfer's project, and others currently under development, in limbo. The temporary pause could last through the election and might become permanent if the administration deems that approving additional projects would be too harmful to the environment.
So, even if Energy Transfer were to secure Woodside as an equity partner, it couldn't begin construction on Lake Charles until the DOE started approving projects again.
One step forward and two back
Energy Transfer has been trying to capitalize on the U.S. natural gas and LNG boom for years by converting Lake Charles into an export facility. However, it has faced a series of setbacks that have delayed the project. While it seems to be close to overcoming one hurdle, an even bigger one remains.
That's disappointing because Lake Charles would be a needle-mover for the MLP. It would earn incremental income from the equity stake it retains in the project. On top of that, its gas pipeline network would benefit from increased volumes flowing to the facility.
However, while Lake Charles LNG would provide a boost, Energy Transfer will be just fine without the project. It has a solid pipeline of other organic expansion projects and a strong balance sheet to make acquisitions. Those catalysts drive the MLP's view that it can grow its distribution (which yields an eye-popping 9%) by 3% to 5% per year without Lake Charles LNG. That should give the MLP the fuel to produce attractive total returns for its investors, making it an appealing investment opportunity.
