As New Year's Eve quickly approaches, and we all prepare to make our 2013 investing resolutions, it's a good time to reflect on the energy and materials sectors in year that was 2012. In this December series, our writers will be recapping some of the most popular, highest-performing stocks in these two sectors. We will examine whether the gains these companies provided their shareholders in 2012 are sustainable, or whether they merely can be attributed to one-time events or fizzling trends. Consider these pieces as gifts to benefit our Foolish, long-term investors seeking exposure to the energy and materials sectors. Today we're going to look at Cheniere Energy (LNG -0.73%), which is up 107%.
How it's done in comparison with its peers
It's difficult to compare Cheniere with its peers, because the company really has no peers. Cheniere is the only company to receive an unrestricted license to export liquefied natural gas from the United States. There are three other licensed LNG export facilities in the U.S., but they're allowed to export only to countries with which the U.S. has a free trade agreement.
The year that was Cheniere 2012: Things fall together
Remember when Cheniere built all of those facilities to import natural gas? Well, so much for that idea. With American companies producing gas hand over fist, we have more of the stuff than we know what to do with. Luckily for Cheniere, the facilities that it built for imports can be converted to export as well, and Cheniere is betting the farm on that very idea. Thanks to widening spot prices for natural gas around the globe, it's now commercially possible to liquefy, ship, and regasify natural gas.
Japan Liquefied Natural Gas Import Price data by YCharts.
While these price differentials are rather extreme, keep in mind that there are heavy costs associated with turning the gas to liquid and back to gas. The opportunity to profit is there, but don't expect a $14 profit per million BTUs of gas going from the U.S. to Japan.
To make these projects happen, the company will need a lot of capital, and that's where Blackstone Group (BX) comes into play. Back in August, Cheniere raised $2 billion in funding from issuing shares in its LP Cheniere Energy Partners (CQP 1.21%) to the Blackstone Group.
Also, thanks to a political kerfuffle, U.S. department of energy says it will not issue any other LNG licenses until it has reviewed a complaint regarding the Cheniere license. So, barring any major changes in the recent future, Cheniere will have the sole rights to export beyond U.S. free trade agreements.
With all of these elements falling into place for the company, the orders from overseas have been pouring in. Cheniere has contracts at capacity for the facility three years before the first liquefaction treatment train goes online. Since November of last year, Cheniere has signed five 20-year deals with the U.K.'s BG Group, Spain's GasNatural Fenosa, India's GAIL, South Korea's KOGAS, and, most recently, French giant Total (TTE 1.72%), respectively. These contracts equate to approximately 2.2 bcf per day leaving Cheniere's Sabine Pass facility in Louisiana.
And to throw a cherry on top of a good year year, there is a chance that Cheniere will start paying a dividend.
Is this sustainable?
If this political stalemate stands for some time, then Cheniere essentially has a government-mandated monopoly on LNG in the United States. With a viable outlet for the glut of U.S. supply, several shale gas plays will ramp up production to meet a global demand for what was previously considered a regional product. Keep in mind, though, that Cheniere doesn't expect its Sabine Pass facility to come online before 2015. By then, it is possible that another one of the six LNG ports in the U.S. could receive an unrestricted license. While this may not hurt operations at Sabine Pass, it could have implications for the development of its second facility in Corpus Christi, Texas.
Another wild card in this story is Canada. Back in October of last year, Canada's National Energy Board granted the Kitimat LNG terminal in British Columbia a 20-year export license. This facility, a joint project of Apache (APA 0.56%), EOG Resources (EOG 1.07%), and Encana (OVV 0.87%), is strategically placed to tap into Alberta's massive gas reserves and could serve the Asia-Pacific region much better than Cheniere's facilities in the Gulf.
In all, Cheniere remains a strong play in the natural gas market, but investors should keep an eye out for some of these developments because they could change the investment thesis for this company.
There are several distinguishing factors between each of the steps in the energy sector, but there is one element that each industry has in common. There is one company that stands at this crossroads, and investors could stand to get rich taking advantage of its unique position. To get a copy of our research report, click here.
