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Look at LNG Exporters Before It's Too Late

By Joshua Bondy - Feb 18, 2014 at 9:39AM

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Now is a great time to roll up your sleeves and investigate LNG exporters before their valuations become inflated.

Sempra Energy (SRE 0.91%) has joined the exclusive ranks of fully approved U.S. LNG exporters. In the lower 48 states there are plans to export more than 35 billion cubic feet of natural gas per day (bcfd) from 30 export facilities to countries without free trade agreements (FTAs), but counting Sempra only six facilities have been approved. The challenge is to get these facilities approved and have contracts signed before big Asian buyers can make a competitive LNG spot market.

LNG exports make for an attractive growth market
Converting Sempra's Cameron facility to an export terminal with liquefaction has a projected total project cost from $9 billion to $10 billion. This big growth project is not expected to reach full commercial operation until 2019, but it is a critical part of Sempra's plan to grow earnings at a 9% to 11% CAGR from 2013 to 2019.

Sempra owns San Diego Gas & Electric, and this LNG export facility helps further diversify the company's earnings. California is the U.S. solar hot spot. The growth of distributed solar systems fundamentally changes the traditional utility market structure by creating millions of small energy producers, putting a portion of Sempra's earnings at risk. 

Sempra is not the only utility looking to get into the LNG game. Dominion Resources (D 0.12%) runs electrical utility operations in North Carolina and Virginia, along with gas services in Ohio and West Virginia. Its $3.4 billion to $3.8 billion Cove Point liquefaction project is already approved to export 1.0 bcfd to FTA countries and 0.77 bcfd to non-FTA countries. Dominion Resources is hopeful that construction can start in 2014 and be completed by 2017.

It is best to hold off before investing in Dominion Resources. The company is considering spinning off Cove Point and its Blue Racer midstream assets into an MLP. When it is on the market this MLP should be a good growth opportunity for Dominion and investors. Blue Racer already has 500 miles of gathering lines in the Utica shale, a growing formation close to the highly populated eastern seaboard.

Dominion does face some risks from its coal plants. The EPA is tightening up emissions constraints on power plants, slowing shifting utilities away from coal. In 2013 coal was Dominion's biggest fuel in terms of net summer generation capacity, but it also owns significant amounts of natural gas generation. Going forward the MLP should help grow the company's earnings and decrease potential challenges related to its coal power plants.

A pure LNG export play
While big utilities are excited to get into the LNG game, Cheniere Energy Inc (LNG -0.05%) has a head start. The company expects that the first four approved trains of its Sabine Pass Terminal will be done by 2017 at the latest. Permits permitting, Cheniere hopes that its Corpus Christi facility and two more trains at Sabine Pass will be finished by 2018 and 2019 respectively. 

Cheniere has also decided to go the MLP route to take advantage of the stable cash flows it generates. By signing long-term contracts with fixed fees it is able to decrease its dependence on the spread between U.S. and international gas prices. Such contracts cannot remove all risk, but they make the company much more stable.

Cheniere Energy Inc is the general partner with 2% interest and incentive distribution rights of its MLP, Cheniere Energy Partners LP (CQP -1.08%). Cheniere Energy Partners LP owns Sabine Pass' regasification and liquefaction facilities along with the Cheniere Creole Trail Pipeline.

If you don't want to deal with a K-1 every year Cheniere Energy Inc is a good option. Thanks to its general partner interest and common partner interest in Cheniere Energy Partners LP it expects to have $940 million in annualized net cash flow once Sabine Pass' first four trains are running.

If you want to go the MLP route Cheniere Energy Partners LP is an attractive deal. It is trading around $30 per share and expects to produce $3.00 to $3.20 in distributions per common share by 2017. This means that right now you can buy it with a 10% future distribution yield.

Bottom line
Dominion Resources and Sempra Energy are hoping to use LNG exports to grow their businesses in a more diversified fashion. Dominion Resources' plan to spin off its LNG export facility into an MLP means that it is best to hold off investing until its plans are finalized. Cheniere Energy Partners LP is probably a better choice, as it is already up and running. The LNG market is growing, and now is a great time to start looking at exporters with signed contracts.


Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Dominion Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Cheniere Energy, Inc. Stock Quote
Cheniere Energy, Inc.
$161.20 (-0.05%) $0.08
Dominion Resources, Inc. Stock Quote
Dominion Resources, Inc.
$85.55 (0.12%) $0.10
Cheniere Energy Partners, L.P. Stock Quote
Cheniere Energy Partners, L.P.
$49.13 (-1.08%) $0.54
Sempra Energy Stock Quote
Sempra Energy
$169.05 (0.91%) $1.53

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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