It’s no secret that the United States is awash in natural gas. The fracking and unconventional drilling boom has allowed a variety of energy companies to tap various shale rock formations throughout the country, which continues to unearth more natural gas — even as rig counts have fallen. With a lack of domestic demand, this sheer abundance of available natural gas has pulled prices to record lows.
The energy industry’s answer has been to ship the supply overseas, where it’s being demanded in spades.
Liquefied natural gas (LNG) exports from the U.S. are coming soon, and the only way to play the trend is through Cheniere Energy (LNG). Cheniere continues to rack-up the necessary permits required to begin shipping LNG across the globe.
For investors, when it comes to LNG (the fuel), they should think LNG (the stock).
Another LNG Win for LNG Stock
The story for Cheniere Energy and its LNG export goals started years before fracking took hold in the U.S. Domestic natural gas prices were high at $15 per MMBtus. At that price, it was cheaper for many utilities and chemical manufacturers to import natural gas rather than buy domestic gas to run their operations. Cheniere was actually an importer of natural gas.
However, fracking changed the dynamics of natural gas production in North America.
Rather than sit on billions of dollars worth of unused infrastructure, Cheniere’s management decided to flip the script and use its facilities to begin sending our bounty back overseas. The key is that LNG already had facilities in place. While there is still plenty of construction and re-tooling of regasification equipment needed, LNG has the edge when it comes to exporting LNG.
The company’s first-mover status also helped it secure necessary permits to begin exporting the fuel — to nations both with and without free trade agreements. In total, LNG has received approval from the U.S. Energy Department to ship 2.2 billion cubic feet of natural gas per day over the next 20 years.
And, the approvals keep coming. At the end of June, Cheniere was granted permission to expand export capacity at its flagship Sabine Pass terminal to those countries without free trade agreements. Two additional production facilities will allow Cheniere to export an additional 1.38 billion cubic feet of LNG per day.
This approval follows additional wins for Cheniere over the last year. LNG has gained FERC approval to construct a new liquefaction facility in Corpus Christi at the end of 2014, and recently won authorization for exports from this expansion project. Meanwhile, Cheniere recently announced a $550 million export terminal designed to ship light oil — known as condensate — in Texas. That terminal will be able to export any type of U.S.-produced oil (i.e., West Texas Intermediate) if/when the U.S. crude export ban is lifted.
With a plethora of permits in tow, Cheniere expects the first LNG shipments from its Sabine Pass facility to begin flowing at the end of this year. That’s light years ahead of competitors such as Dominion (D) and Sempra Energy (SRE).
Given the huge price differential between U.S.-produced Henry Hub benchmarked natural gas and international LNG standard Japan Crude Cocktail, energy producers are going to jump at Cheniere to get their product into the market first. All said and done, Cheniere expects to bring in a total of $4.4 billion in annual revenue from its Sabine Pass facility alone.
Making a Play for Cheniere
Given its first-mover status and major lead time over rivals, the only real play in LNG is Cheniere. Plus, there’s more than one way for investors to get their fix. Cheniere, like many midstream energy firms, has utilized a master limited partnership (MLP) tax scheme to down-drop much of its infrastructure faculties.
The Sabine Pass facilities and their cash flows have been place into MLP Cheniere Energy Partners, L.P. (CQP). CQP holds import terminals including the Creole Trail Pipeline. These assets currently provide cash flow, and as such, CQP yields a respectable 5.3%. As the Sabine Pass export assets come online, CQP should be able to further increase distributions. But, as an MLP, CQP is merely a pass-through entity for access to the assets’ cash flows.
For investors who want more control, LNG is the answer. The key is that LNG holds the general partner of CQP, and GPs are the best places to find dividend growth over the long haul. LNG will receive payments as GP and owner of 49% of all CQP units, as well as incentive distribution rights (IDRs) from growing the MLP.
Additionally, LNG holds the Corpus Christie assets and will eventually drop the facility into CQP in exchange for cash. LNG currently doesn’t pay a dividend, but once the facilities start producing exports, it should. The only issue for LNG stock is that it’s a tad expensive, as you’re paying today for tomorrow’s revenue. Plus, building out LNG plants are quite expensive, and Cheniere’s debt load is higher than most. But, that load shouldn’t be an issue once the Sabine Pass starts exporting.
Bottom Line
Cheniere continues to be the best play in North America’s LNG ambitions. Its first-mover status, long-term contracts, and existing facilities will make it the dominant player in the sector. Investors should place their bets with LNG or CQP.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
