Lng Annual Report

Image source: Cheniere Energy annual report.

Cheniere Energy Partners' (NYSEMKT:CQP) decade-long soul search is finally coming to an end. After starting out as the owner of a Liquefied Natural Gas -- LNG -- import terminal to meet America's gas demands a little over a decade ago, the company has had to do a 180 to become a gas exporter as shale drilling has taken off in the U.S. The company has completed construction of one of its export facilities and is now an operator, not just an investment in the idea of LNG exports from the U.S. With this new role comes some risks, but they aren't the risks many assume they are.

Let's take a look at why the most common risk -- the LNG market -- isn't the problem investors should worry about, and where their concerns should lie in the coming years. 

Natural gas prices aren't the problem

One thing many will point to as an issue for Cheniere Energy Partners is that it's in a commodity business. The two biggest concerns here are that the company's earnings will take a deep hit as natural gas prices rise, or that the market for LNG will become oversupplied as several LNG export terminals come online over the next five years. Surprisingly, though, this isn't as much of an issue for Cheniere Energy Partners as many might think, and the reason has to do with the way the company's contracts are written.

When Cheniere Energy Partners' Sabine Pass LNG facility becomes fully operational, about 87% of the facility's production capacity will be sold on long-term contracts that are mostly fee-based. Cheniere gets an annual fixed fee, a per unit of gas processing fee ranging from $2.25-$3.00 per million BTUs, depending on the size of the customers' contract, and a natural gas sourcing fee, which is 15% on top of the Henry hub spot price of gas at that given moment. So, there is some revenue variability in that natural gas sourcing fee, but it's quite small in comparison to the processing and annual fees. 

There is a lot of comfort in these contracts. They are all 20-year contracts with investment-grade companies, which means there's very little counter-party risk, and they cover enough of the facilities' total production capacity that any large declines in spot market prices means the company's overall earnings won't be affected too much. You could even argue that since the company has direct ownership of these assets, it's a less risky investment than its parent, Cheniere Energy (NYSEMKT:LNG), since its revenue is much more protected and it doesn't have to take on the risks of selling LNG cargoes to the spot market, as the parent company will.

All of its eggs in one (relatively unproven) basket

The big risks for Cheniere Energy Partners and its investors are on the other side of the income statement: operations and costs. The entirety of the company's revenue comes from its Sabine Pass LNG facility. It has a couple pipeline assets as well, but they're mostly used for sourcing gas to the terminal. For Cheniere Energy Partners to deliver on its promise to investors of being a stable, cash-generating company, it needs to show that it can operate this facility consistently. For the time being, that remains an unknown.

This years marks the first time the Sabine Pass facility started producing LNG and delivered cargoes to its clients. Before that, the company had no prior experience operating facilities such as this, so we don't really have a gauge as to management's ability to keep the facility up and running at a high rate, and keep its operational costs in line. Remember, a very large portion of its revenue is fixed, so the company's profits are mostly going to fluctuate if its facility has any downtime, or if its costs are higher than what management has estimated them to be in its investor presentations over the past several years. 

What a Fool believes

There are reasons to think Cheniere Energy Partners is a risky stock, but the future LNG market isn't necessarily one of them. Investors should know that they are still investing in what is a relatively unproven operator of one facility. Any accidents, unplanned maintenance, or anything else that keeps the facility from running at full speed will likely keep the company from realizing its profit potential.

Anyone interested in this stock should check in on the company's quarterly results to see if the company has been able to keep its facilities running at a high usage rate without unplanned downtime or unexpected shutdowns. If it can keep its operations in check, then it may not be as risky of an investment as it sounds. 

Tyler Crowe has no position in any stocks mentioned. You can follow him at Fool.com or on Twitter @TylerCroweFool.

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