Is It Time to Invest in LNG Exports?

Year to date, shares of Cheniere Energy (LNG 1.07%) have jumped by almost 119%. Despite the sharp rise in the company's stock, it has yet to turn an operating profit in past quarters. Most of the company's valuation is based on future expectations for growth in revenues from exporting LNG. But will exporting liquefied natural gas become such a lucrative business in the near future? Here are three reasons why exporting LNG might not be as profitable as many expect.  

1. Competition to export from the U.S. is rising
Cheniere Energy was the first company to receive a license from the U.S. Department of Energy back in 2011. The company was the only one with such a license, because the DOE didn't approve any additional licenses during 2011 and 2012. Since May of 2013, however, the DOE has started to approve additional LNG projects for other companies. Up to now, the DOE has approved 27 projects that are capable to export to free-trade-agreement countries, but only four of them were approved to export to non-FTA. Cheniere's Sabine Pass Liquidation terminal is one of these four projects.

The other three terminals were approved in the past several months -- it seems the DOE has expedited the approval process. Moreover, 22 additional application are under the DOE review. The approvals to export LNG to non-FTA were given to the Freeport LNG Expansion terminal, to BG Group and its Lake Charles Exports terminal, and to Dominion Resources and its Dominion Cove Point LNG project. If the DOE continues to approve other terminals, this could raise the competition to export LNG.   

2. LNG business rapidly growing outside the U.S.
The main disadvantage U.S. exporters have is their distance from the main importers of LNG such as China and Japan. The widening of the Panama Canal will help get bigger LNG tankers through, which will cut down the transport costs. But LNG projects around the world continue to develop and increase competition. The U.S. faces strong competition from Australia in the Asia-Pacific region. Among the companies that have increased their LNG operations in Australia are Chevron (CVX 0.21%) and ConocoPhillips (COP -0.18%).

Chevron has a joint venture with Apache Energy and several other companies to produce and sell LNG from the Wheatstone Project located in Western Australia. This venture will supply from its two LNG trains a combined 8.9 million tonnes per year. Chevron recently signed an agreement to sell 0.9 million tonnes of LNG per year for 20 years to Tohoku Electric Power. 

ConocoPhillips has been in the LNG business since 1969. The company continues to expand its operations, including those in Australia. It is part of the Australia Pacific LNG joint venture, which is expected to start in 2015 and to sell 4.3 million tonnes per year. 

Australia isn't the only up-and-coming LNG exporter. Israel's LNG is also expected to develop in the coming years. Off the shores of Israel huge caches of natural gas have been found in the past couple of years and are expected to be exported to Asia. 

Besides the growing competition in the LNG market, LNG investors also need to consider the wait they have to endure until the export business kicks off.  

3. High investment costs, price uncertainty and long return period
The high capital expenditure of Cheniere Energy has increased its financial risk -- its debt-to-equity ratio rose to 19 as of the third quarter. The company continues to finance its projects by issuing loans: It recently announced $1 billion Senior Secured Notes due by 2022 for its Sabine Pass Liquefaction project. Furthermore, Cheniere Energy expects to start exporting LNG from train 1 of its Sabine Pass Liquefaction project by 2015.

The company has signed contracts to sell LNG from its five trains (out of six) in the Sabine Pass project. These contracts are secured for 20 years -- the most recent one was signed in March 2013 with Centrica. Alas, the price of LNG will remain uncertain: It will be based on the Henry Hub price plus a fixed component. This will maintain the uncertainty around the company's future payments. In any case, until these contracts are implemented and the revenues start rolling in, the high debt is likely to keep Cheniere at a certain risk.  

The liquefied natural gas market is likely to become the next big thing in the energy market, but it might also suffer from low profit margins on account of high competition. Therefore, I remain skeptical of Cheniere Energy's high valuation and investing in LNG exports.