Energy Transfer (ET 0.08%) has been trying to convert its Lake Charles terminal to a liquefied natural gas (LNG) export facility for the past decade. After numerous delays, the company appeared to be on the precipice of finally making a Final Investment Decision (FID) on that project early next year. However, instead of approving the project, the company announced its surprising decision to suspend the development of Lake Charles LNG.
Here's a look at what drove this decision and what it means for the master limited partnership's (MLP) future.
Image source: Getty Images.
The latest roadblock
Energy Transfer has been working on developing an LNG export terminal in Lake Charles, LA, for more than a decade. The company designed the project with the capacity to liquify and export 16.5 million metric tons per annum. However, it has had to overcome several obstacles over the years, including challenging marketing conditions, the loss of its joint venture partner Shell, intense competition, and permitting issues. Those issues have caused continual delays in the company's ability to approve the project over the years.
However, momentum had been building toward an FID over the past year. Energy Transfer has secured several commercial agreements with customers to buy LNG from the proposed terminal, including Shell, Chevron, and MidOcean Energy. As a result, it now has enough commercial support to approve the project.
NYSE: ET
Key Data Points
The latest issue is that the company doesn't want to fund this large-scale project on its own. It wanted to sell down 80% of its interest to equity partners before approving the project. While MidOcean Energy agreed to take a 30% stake in the project in exchange for 30% of the LNG production, Energy Transfer hasn't found any other partners for the remaining 50% interest it wants to unload. That's leading the pipeline company to suspend development, although it remains open to discussions with potential partners interested in developing the project.
Too much competition
Energy Transfer decided to suspend the development of Lake Charles LNG to focus on allocating capital to its burgeoning backlog of natural gas pipeline infrastructure projects. These projects have better risk/reward profiles compared to Lake Charles LNG.
For example, the company recently announced an increase in the transportation capacity of the Transwestern Pipeline's planned Desert Southwest expansion project. The company initial made an FID on the project in August, with plans to build 516 miles of 42-inch pipeline from Texas to Arizona with the capacity to ship 1.5 billion cubic feet per day (Bcf/d). The $5.3 billion project had an anticipated in-service date of the fourth quarter of 2029. It's now upsizing this project due to customer demand. It will construct a 48-inch pipeline with a capacity of up to 2.3 Bcf/d at a cost of $5.6 billion.
As a result, Energy Transfer now expects its 2026 capital spending to be $5.2 billion. That's a $200 million increase from its initial budget and up from $4.6 billion this year. This spending will enable the company to work on Desert Southwest as well as fund a whole host of other expansions, including Phases I & II of its $2.7 billion Hugh Brinson Pipeline.
Additionally, the company has several other projects under development that it could approve over the next year. Data center developers Fermi and CloudBurst have signed long-term gas supply deals with Energy Transfer, pending FIDs of their data center developments. Those are just two of the many gas supply contracts it's working on with data center developers and gas distribution utilities. Meanwhile, the company is working with Canadian energy infrastructure giant Enbridge on a potential expansion of the Dakota Access Pipeline that's on track for an FID by the middle of next year.
With so many projects already approved and more under development, Energy Transfer doesn't have the capacity to fund 70% of Lake Charles LNG's cost without straining its financial profile. While approving that project would have been a meaningful growth driver for the company, it has no shortage of expansion opportunities.
A disciplined approach
Energy Transfer has encountered financial difficulties in the past by approving more projects than it could handle. That's leading the company to be much more disciplined these days, focusing only on its best investment opportunities. While Lake Charles LNG is a promising project, other opportunities offer better returns with less risk, leading the company to suspend the LNG facility and focus on even better options. This approach positions the company to grow value for investors in the future, including continuing to increase its high-yielding distribution.
