While oil prices have been absolutely decimated over the past few weeks, that is not stopping Wall Street from funding energy projects. This week, CNBC reported that Wall Street's biggest banks were lining up a $11.5 billion, seven-year bank-credit facility for Cheniere Energy's (NYSEMKT:LNG) Corpus Christi, Texas, natural gas facility. The project, which would cost nearly $16 billion to build, has already raised $2.5 billion in convertible notes to get the ball rolling, but needs the rest of the capital in place before the company makes a final investment decision next year.
Betting big on natural gas
Wall Street banks are betting the company's Corpus Christi export terminal will be critical to supplying much-needed liquefied natural gas to the world when it would come online in 2018. The company, as shown on the slide below, has already signed up 7.7 million tonnes per annum, or mtpa, of its 13.5 mtpa capacity at a fixed fee to support the project's economics and its debt load.
The current contracts, which are spread across a half dozen international customers, are take-or-pay agreements lasting 20 years. Those contracts would provide the company with annual fixed-fee revenue totaling $1.4 billion for those two decades. It's because of this solid economic foundation that banks are willing to step up to the plate and provide the company with billions in funding.
A bridge over troubled waters?
Cheniere Energy needs the loan as a bridge until more permanent funding can be put in place. That permanent funding would come in the form of high-yield bonds that the company expects to issue over the next two years. The current plan calls for $4 billion in bonds to be issued in 2015, with another $7.5 billion in bonds hitting the market the following year. However, those bonds issuances could occur when the high-yield debt market might be in trouble if oil prices don't rise.
Analysts now forecast that a large bond bubble will burst in high-yield energy bonds as early as 2016, with as much as 40% of such bonds going into default. This dire prediction stems from the plunge in oil prices, which could have a big impact on the many highly indebted oil companies that might run into trouble when their oil hedges run out at the end of 2015. An upheaval of that magnitude could shut the door on the high-yield bond market to energy companies, which would be a big problem for Cheniere Energy when it is marketing those bonds.
An additional concern is news that China is looking to offload some of its long-term LNG import capacity agreements. Reuters reported this week that Sinopec, one of China's state-controlled energy companies, wants to offload supplies coming from Australia and Papua New Guinea. China's slowing economy is weakening domestic demand for energy, which is forcing the nation to look for other takers for this gas. This is a risk to Cheniere Energy's project because natural gas demand in Asia is a key driver of future demand, so it might be difficult for the company to sign up the remaining capacity at Corpus Christi that is needed to make that project's economics even more attractive.
The world energy markets are in turmoil, as demand for energy has been much lighter than anticipated over the past six months, while supplies have continued to skyrocket thanks to U.S. shale plays. That could put Cheneire Energy in a tough position down the road, especially when it comes to refinancing its bank debt. Needless to say, investors need to watch this threat closely, as the long-term nature of the project could be upended by short-term worries.